Require Tenants to Pay Maximum Premium Rent for Long Holdovers

Many commercial leases include a “holdover” clause requiring the tenant to pay a holdover premium in the range of 150 percent to 300 percent of the rent amount if it remains in the space after the lease ends. This “step-up” is designed to heighten the pressure on the tenant to vacate and compensate the landlord for not having free use of the space. In many cases, the holdover premium increases even more over time as the holdover drags on.  

At least, that’s how it should work. But if your holdover clause is anything like many we’ve seen, it may contain an ambiguity that could compromise the effectiveness of subsequent step-ups. And that could end up causing you to get much less holdover rent than you expect. 

To explain, let’s use the example of a clause that provides for a subsequent holdover premium step up from 150 percent to 200 percent if the tenant continues to hold over past 30 days. While the formula and numbers may seem clear, the wording of the clause may create confusion on a crucial question: Does the 200 percent holdover premium rate for a holdover lasting 30 days apply to the entire holdover term or just day #31 and beyond?

The Costs of Holdover Clause Ambiguity

Holdover rent can run into hundreds of thousands and even millions of dollars, depending on the tenant, size of the space, and length of the holdover period. With so much on the line, just about any ambiguity in the holdover clause is likely to lead to dispute and potential litigation. Win, lose, or settle, the only clear outcome will be aggravation, wasted time, and a big legal bill. 

Solution: Specify that Subsequent Holdover Step-Up Applies Retroactively

You can prevent such disputes—and guarantee yourself all of the holdover rent you anticipate in negotiating the lease—by clearly spelling out that any second and subsequent step-ups in holdover rent resulting from the holdover’s continuing past the stated initial period will apply retroactively, starting on the first day of the holdover period. Here’s a quick drafting recipe: 

Step 1. Set initial holdover premium. Establish an initial holdover premium that applies, starting on the first day of the holdover until a stated period. Thus, our Model Lease Clause stipulates that the tenant must pay 150 percent of the adjusted minimum rent for the first 30 days of the holdover, starting on day one [Clause, par. a]. 

Step 2. Set second holdover premium. Next, provide for a subsequent step-up in adjusted minimum rent if the holdover lasts beyond the initial period. Under our Model Lease Clause, the holdover rent increases from 150 percent to 200 percent after 30 days [Clause, par. b].

Step 3. Make second holdover premium retroactive. Crucially, the clause imposing the second step-up to 200 percent should also expressly state that it applies from and includes the first day of the holdover period through the date the holdover ends and the tenant moves out of the space. This will keep the tenant from claiming that the second step-up kicked in only after the holdover went past 30 days [Clause, par. b].  

Holdover Premium Applies to Entire Leased Premises

Last but not least, make it clear that the respective step-up provided for in each paragraph of the clause applies to the entire premises, even if the tenant holding over actually vacates part of the space. Thus, for example, an office tenant that continues to occupy only one of the three floors it leased won’t be able to claim a 66 percent discount on the minimum adjusted rent on which the holdover premium is based.

MODEL LEASE CLAUSE

Make Tenants Pay the Highest Premium Rate that Applies to Holdover Term

Landlords typically require tenants that hold over to pay premium rent. That premium then steps up if the holdover drags on past a certain point. It’s crucial to be clear that these subsequent step-ups, if they occur, apply retroactively to the start of the holdover. Here’s a Model Lease Clause you can use to implement this arrangement, based on an initial holdover premium of 150 percent that increases to 200 percent if the holdover lasts more than 30 days. Of course, you can plug in any numbers that you want. In addition, while our Model Lease Clause provides for only one subsequent step-up after 30 days, you can incorporate further increases—for example, a step-up to 250 percent after 60 days and 300 percent after 90 days, etc. The important thing is to talk to your attorney about adapting the Model Lease Clause for your own circumstances.   

TENANT HOLDOVER

a.         Adjusted Minimum Rent for First 30 Days of Holdover: In the event Tenant holds possession of all or any part of the Premises for [thirty (30)] days beyond the Expiration Date or Termination Date, as applicable, Tenant shall pay Landlord [one hundred fifty percent (150%)] of the Adjusted Minimum Rent on the entire Premises from and including the first (1^st) day of holdover until the holdover period ends.  

b.         Adjusted Minimum Rent for Subsequent Holdover: Notwithstanding the foregoing, in the event Tenant holds possession of all or any part of the Premises for more than [thirty (30)] days beyond the Expiration Date or Termination Date, as applicable, Tenant shall pay Landlord [two hundred percent (200%)] of the Adjusted Minimum Rent on the entire Premises from and including the first (1^st) day of holdover until the holdover period ends.