In most boilerplate commercial leases, should a tenant remain in possession of their premises after the expiration of their lease term, the tenant will likely be responsible on a monthly basis for 200% of the rent due in the final month of the lease term, and possibly the consequential damages that the landlord incurs from this ‘holdover’
These consequential damages could be extensive and costly. For example, if a current tenant ‘holds over’, thus becoming a “Tenant-at-Sufferance”, while the landlord has procured a prospective new tenant ready, willing, and able to lease the space going forward, but only if they can take occupancy immediately, this could prevent that new lease from taking effect and result in major losses of potential revenue to the landlord. If they cannot take occupancy because of the holdover, and the landlord loses that transaction as a result, the subject tenant could be liable for serious damages to the landlord. If this were to happen in a soft market, it is quite possible that another ready, willing and able tenant may not emerge for months – possibly years. CoStar, the pre-eminient commercial real estate information service in the U.S., represents an average of about two years to back-fill vacant office spaces in mild markets in South Florida.
This is why it is very important to limit a tenant’s liability in terms of both the actual penalty costs and also potential open liability. In many cases, we as tenant representatives can change that 200% premium to 150%, sometimes 125%, and at other times have the first 60 days with no penalty and 125-150% after that. This can apply to the Base Rent or the Gross Rent (Base Rent + Additional Rent/Operating Expenses/CAM) depending on the transaction.
Also, beware of unclear language in the lease. Holdover may be defined or interpreted by a landlord simply as a tenant’s failure to deliver the premises at the expiration of the lease term in the condition required by the lease. Under current Florida electrical code, tenants must remove IT cabling upon vacation of the premises/expiration of the lease. A simple non-removal of cabling could technically prevent a landlord from leasing to a tenant immediately and obligate a tenant to holdover penalities. Protect yourself from this whenever possible. If a landlord will not waive all of their rights to recover in the wake of consequential damages – limit their ability (and your liability) as much as possible – and manage the expiration of your lease with the landlord as early as you can.
Sometimes holdover penalties can be offset by negotiating into new leases equivalent penalties for the new landlord should they not complete the interior build-out promptly – delaying occupancy and resulting in holdover. Two days of total abatement for every one day that exceeds the targeted completion date should cover the ‘anticipated costs’, provided they are per diem and not based on the whole month, but the ‘consequential damages’ would not be.
Negotiate your lease carefully. Be mindful of your lease expiration date. If you do not have protective language, work with your current landlord in advance if you think that you may need to hold over for a short spell. Some will work with tenants while others will simply guide them back to the lease and make clear that only the written terms will govern. One more tip, some landlords are better than others. When evaluating property for your business, evaluate the landlord and management company in advance as well.