Holdover Tenancies (Revisited)
Holdover Tenancies (Revisited)
Last year, I wrote the following blog entry on holdover tenancies and the right of the landlord to collect an increased rent rate during any holdover period: http://rrlawaz.com/2010/07/holdover-tenancies/ The increased rent rate is typically 125% – 200% of the last month’s rent rate.
From the landlord’s perspective, the right to collect increased holdover rent serves two primary purposes: (1) the increased rent allows the landlord to recapture some of the damages associated with a tenant’s failure to timely surrender the premises, and (2) the increased rent provides a disincentive to the tenant to wait until the end of the lease term to negotiate for a lease extension. Both of these purposes assume that the tenant is not welcome to continue as a month-to-month tenant upon lease expiration and that the landlord has a tenant ready to move into the premises upon lease expiration.
In practice, however, this is rarely the case. Landlords and tenants frequently agree that the tenant can continue as a month-to-month tenant after the expiration of the lease. The tenant may be considering its options, the landlord likely does not have another tenant waiting to move in, and often the parties may not be willing to commit to a rent rate for the next 1, 3 or 5 year period. It is mutually beneficial to continue as a month-to-month tenant.
These holdover rent provisions are being used by landlords as after-the-fact “gotchas.” The tenant continues to pay the same rent as a month-to-month tenant, sometimes for over a year, and then gets invoiced for the unpaid excess holdover rent.
The landlord likely has the contractual right to collect the holdover rent at any time under the lease, and the lease likely was negotiated at arms-length and is binding on both parties. Though the tenant has equitable arguments that the landlord is estopped from claiming the holdover rent due to failure to object when the rent payments are made, a court likely would be unsympathetic to a commercial tenant if the lease provides otherwise.
The reason I decided to revisit this topic is because I thought of a fair compromise. The holdover provision should state that the landlord is entitled to collect an increased holdover rent, but the landlord must provide at least 30 days’ advance written notice before exercising this remedy. Also, the landlord should not be permitted to deliver the notice more than 60 days in advance of any holdover tenancy (to avoid the landlord providing notice too far in advance so that the tenant does not remember receiving the notice). If the landlord fails to provide such notice, the tenant may continue to pay the same rent amount during its month-to-month tenancy. Tenants should consider negotiating for this compromise provision in their future commercial leases.
Prior to using any language or concepts from this blog entry, consult with an attorney.
Ryan Rosensteel is a real estate, business and construction attorney licensed in Arizona. You can contact him at rrosensteel@rrlawaz.com.