If you’re a New York City commercial tenant, you’ve experienced long and complicated lease documents by now. Commercial office, loft, and retail leases are known for numerous clauses containing complex and subtle language that can impact your tenancy. The holdover clause is one of the most important and consequential of these.
For landlords, a holdover clause helps prevent downtime on their space and allows them to rent the space as soon as possible.
Yet, understanding the clause is critical for tenants because of the potential economic penalties. A landlord can increase rent by 1.5x, 2x, or 3x if tenants do not vacate once the lease expires.
If you never negotiated the penalty terms, did not begin your search for a new space with enough time before your lease expired, or overlooked the economic consequences, you can learn about holdover clauses the hard way.
A holdover clause may sound obscure, but it can significantly burden you and your business if you don’t plan ahead.
What Is a Holdover Clause?
A holdover clause protects landlords if tenants fail to vacate their space promptly upon the lease’s termination date. The clause’s language states that if a tenant stays beyond the end of the lease, they have to pay an economic penalty.
Pricewise, here’s how economically damaging a holdover clause can be for a tenant. Let’s say you pay $10,000 monthly for a 2,000 SF office space in a Class A building in Times Square.
You signed a lease for a new office in Downtown Manhattan three months ago. Construction for your new space was supposed to be completed two months before the expiration of your current lease. However, your new landlord’s contractor experienced three months of construction delays. You will have to stay in your existing space for at least one month beyond your lease expiration.
Therefore, if your holdover penalty is 2x, you will pay double your $10,000/month rent. In other words, a holdover penalty of $10,000 on top of your usual rent.
Timewise, a tenant can sometimes hold over month-to-month with no substantial rent increase, but this depends on the language of the original lease.
Other times, the tenant must vacate at the end of the lease but can stay month-to-month at an increased rent.
Why Landlords Need a Holdover Clause
Landlords tend to be pragmatic, reasonable business people and are willing to accommodate. But they also have to protect their interests.
On a basic level, holdover penalties are justified.
Landlords want to avoid downtime on their space by any means necessary. If a tenant has not renewed their lease and their lease expires on a specific date, they want to get a new tenant as close to that date as possible.
Landlords have a lot to lose if they don’t know when they can get possession back of a space. They also need predictability to effectively market their space. A landlord cannot rent a space to a new tenant unless they know when it is becoming available.
How can they promise a new tenant something as concrete as a move-in date if an existing tenant unexpectedly stays beyond their lease expiration?
Scenarios That Can Cause a Tenant To Holdover
If you’re a potential tenant saying a holdover situation could never happen to you, you’re playing a very dangerous game.
Scenarios like the following are more commonplace than you realize. They are enough of a reason landlords need a holdover clause and why you should negotiate the fairest terms you can.
- If a tenant cannot locate and acquire a new space that meets their requirements before their existing lease expires. Despite searching extensively.
- A tenant waits until the last minute before commencing their search for a new space.
- The tenant signed a lease on a new space requiring work, but the landlord faces construction delays
- The tenant found a new space before their lease expired, but the new space fell through because attorneys couldn’t agree on legal terms.
Penalties in Holdover Clauses are Negotiable
Negotiating the amount of the holdover penalty is relatively basic. Either your broker or your attorney can do so. Negotiating a reduction can greatly impact you if you unexpectedly find yourself unable to leave your space for a few months after your lease expires.
Leases are complex legal documents with 30-100 different articles and clauses. Once a lease is signed, it’s stowed away, with the particulars often forgotten.
Tenants tend to forget about the holdover clause and its penalties once it’s too late. They can end up in big trouble if they ignore the specifics.
Tenants Can Prevent a Holdover by Planning Ahead
If you’re a tenant who wants to leave your current space for a new one, the most important thing you can do to prevent a holdover is to plan ahead.
With a holdover clause, it’s essential to look for space early enough to reduce the likelihood that you become stuck in a situation paying double or triple rent.
Start researching the real estate market months before your lease expires so you have enough time to tour properties, submit offers, negotiate business terms and lease language, and allow sufficient time for your new landlord to build out your space.
Under no circumstances do you want to pay a penalty that could have been avoided with careful planning.
The Key Takeaway
Commercial real estate leases in New York City are notoriously long, complex, and filled with hidden fees and clauses. However, everything is negotiable, and a holdover clause is no exception.
However, if you overlook a holdover clause as something that will never affect you, you’re making a big mistake. Holdover clauses can have significant economic consequences for you and your business.
The best thing you can do is to never wait until the last minute before your lease expires to renew or find a new place. You may want to start planning anywhere from six months to a year before your lease expires.
One thing you can consider doing to eliminate the risk of becoming a holdover tenant is to take possession of a new space a few months before your current lease expires. In this situation, you can negotiate some free rent to ensure you are not liable for double rent. You can also have time to furnish your new space and set up internet and telecommunications.
A month or two of free rent from a landlord is undoubtedly a better alternative than the economic penalties of being a holdover tenant.
