Even the most prepared CRE professionals can find themselves as holdover tenants. And that is exactly why it is so crucial to ensure that you are protected.

For example; Let’s say that despite diligently planning a move to a new office, unexpected construction delays by your new landlord’s contractor have thrown a wrench into your carefully coordinated timeline.

As a result, your new office space will not be ready for occupancy as initially anticipated, and you’ll likely need to remain in your current space for an extra time beyond the expiration of your lease.

This situation becomes even more likely and challenging when you’re responsible for managing a substantial portfolio of office spaces. In such scenarios, the risk of becoming a holdover tenant is amplified due to the sheer number of moving parts involved in overseeing multiple properties.

Moreover, when you miss that crucial window for a seamless transition to a new office, it can trigger a chain of complications. The immediate need to secure office space to stop the hemorrhaging caused by holdover costs becomes the most pressing concern. This urgency may force rushed decisions, potentially leading to missed opportunities for better lease negotiations and negatively impacting your daily business operations.

Rent Adjustment in Holdover 

“Rent adjustment” is the landlord’s gentle reminder that lingering beyond your tenancy’s timeframe will come with a rather hefty price tag.

Often, in the case of holdover, the tenancy becomes a month-to-month and of course this comes with an exponential raise of the rental rate. Until leaving the premises, businesses in holdover are known to pay double (or even triple) the negotiated rent. And this is even more severe when considering that the tenant is usually not paying double the base rent but double the rent in its last year (which has undergone years of compounding escalations). Yikes!

Many commercial leases also stipulate that if a tenant remains in their space past the lease expiration date without the landlord’s consent, they will incur additional holdover fees. These fees are typically dramatically higher than the standard rent, and they can accumulate quickly for each day or month the tenant remains in the space as a holdover.

Consequential Damages

The landlord doesn’t want to deal with additional financial losses and expenses due to the tenant’s failure to vacate. Charging you a premium is essentially their way of saying “don’t let the door hit you on the way out.”

The landlord may suffer from the loss of income because the space is not available to lease to a new tenant, or the landlord may need to expedite the restoration of the premises to make it suitable for the next tenant.

This can involve expenses for repairing, cleaning, or renovating the space, as well as potential financing costs and overtime labor expenses. So, beyond the substantially higher rent rate, tenants in holdover may also be faced with consequential damages from the landlord. This is a financial incentive to clear out of the space when time is up.

Tenant liability in the holdover provision can include fees related to the following:

• Lost rental or occupancy income
• Expenses related to additional storage, moving, and relocation expenses incurred by the new tenant
• Expenses from expedited restoration of premises, loan financing costs, interest, and overtime labor costs

Critical to Negotiate Holdover Terms in Original Lease

With so much at stake, you never want to find yourself vulnerable to a holdover clause that isn’t airtight. Negotiating specifics surrounding your holdover tenancy can limit excessive charges, or legal ramifications that may be triggered if you don’t vacate in time.

That’s why it is so crucial to have a representative who has your best interests on your side when you’re drafting the original lease. If not, failure to protect yourself before the situation strikes will leave you at the mercy of your landlord and the laws of your area.

This is all the more reason to steer clear of the landlord’s broker. Landlord brokers are hired and compensated by the property owner, not by you, the tenant. This fundamental conflict of interest means their primary responsibility is to secure the best possible terms for the landlord. This misalignment can place you at a significant disadvantage when it comes to negotiating the holdover clause.

Relying on the landlord’s broker can result in holdover clauses that are heavily biased in favor of the landlord. These clauses may come with exorbitant rent increases, strict conditions, and limited flexibility for you as the tenant.

The other potential danger by leaving your holdover to chance is that in the absence of a negotiated holdover provision, tenants are often vulnerable to state laws. These laws are often generic and may not serve the tenant’s specific interests. On top of this is that laws can vary significantly from one jurisdiction to another. For example, in some states, the very basis of your tenancy is up for debate and original terms you abided by may no longer be valid.

While state laws provide a fallback position, relying on these generic laws can leave tenants exposed to unfavorable terms, unexpected costs, and operational disruptions. To avoid these potential pitfalls, it is essential to include a carefully negotiated holdover provision in the original lease. This provision should be comprehensive and tailored to meet the tenant’s specific requirements and protect their interests in the event of a holdover situation.

Holdover Takeaways for Tenants

A holdover provision in an office lease is undeniably a vital component, safeguarding the interests of both tenant and landlord when the need arises to extend occupancy beyond the original lease term. However, to truly harness the benefits of this provision, thorough and well-considered specifications are imperative during the original lease drafting.

Without such precautions, both parties may find themselves exposed to unforeseen challenges and legal complexities, as default state laws can be vague and potentially unfavorable. In this context, clear communication and proactive negotiation are fundamental. 

And in this process, when you have a True Tenant Representative™ by your side, you gain an ally who is committed to securing terms that offer you the greatest flexibility, protection, and financial advantage. Whether it’s holdover clauses or any other critical lease terms, this advocate is your key to navigating the commercial real estate landscape with confidence, ensuring your business remains in control and poised for success.

Beyond the holdover clause, there’s a litany of considerations when drafting your optimal office lease. So maximize your potential for success and learn how True Tenant Reps™ find the best office spaces for the best prices and terms.