October 6, 2022

Landlords can enforce ‘holdover' tenancy when business premises are left in a dilapidated state

Fandel

Harrison-Delgado

In most states, a commercial tenant is considered to be in “holdover” status under its lease when it continues to maintain possession of its premises after the lease term has ended, but the tenant does not have the landlord's express consent.

Landlords and tenants often try to prearrange the key terms and legal effect of a tenant's holding over by explicitly stating in the lease document important details, such as:

• The minimum length of any such holdover tenancy (for instance, does a two-day holdover require the tenant to pay rent for a full month?).

• The new rent amount (for instance, the holdover rent rate is typically between 120% and 200% of the rent that was in effect at the end of the scheduled term).

• The landlord's continuing right to evict the tenant, notwithstanding the tenant's holding over.

• Whether and the extent to which the tenant remains liable for damages incurred by the landlord because the tenant didn't vacate the property on time (for instance, if the tenant will be liable to reimburse the landlord for the latter's “lost profits” because a prospective replacement tenant grew tired of waiting for the holdover tenant to leave and found alternative space).

However, a dispute can occur when a tenant vacates the premises on schedule at the end of the lease term, but leaves the premises in a state of significant disrepair, with costly deferred maintenance items or damaged facilities. In this situation, many landlords will not only want to recover the cost of the repair work they must undertake, they will also want to collect rent from the outgoing tenant for the length of time it takes the landlord to complete the repairs. And, if they can, landlords will want to treat this situation as a form of “holdover” by the tenants, so that the landlords can take advantage of any “holdover premium” or rent increase typically imposed by many lease holdover clauses.

However, even where a tenant agrees to reimburse the costs of the landlord's required repairs, they will strongly resist being labeled as a “holdover” tenant. Tenants take this position not only because they want to avoid the (usually quite high) holdover rent premium they must pay, but also because accepting the continued legal status as a “tenant” requires them to honor all the other terms and conditions of the lease, including those regarding insurance, indemnity and other premises liability matters — provisions that could expose them to significant potential liability at a time when they're not even in actual physical possession of the space.

Since most commercial leases are silent as to whether the tenant will be deemed a holdover tenant under these circumstances, a landlord may be forced to commence a court action to get a judge to ratify the tenant's status so that the landlord can recover rent — together with any applicable holdover rent increase — from the tenant for the period during which repairs are underway.

While published court decisions on this issue reach different conclusions, they tend to consider the same factors, and are more likely to conclude that a vacating tenant remains a “holdover” tenant where:

• The tenant's actions were particularly bad or egregious.

• Lost rent to the landlord is significant.

• Unrepaired damage or deferred maintenance is substantial and extensive.

• The landlord's repair costs are substantial.

• The landlord is unable to reasonably use (i.e., relet) all or significant portions of the premises during the period of repairs.

• The landlord has made reasonable efforts to relet the premises or at least the portion thereof that could still be occupied during the repair period.

The more of these factors that are present in any given situation, the more likely a court will ultimately conclude that a holdover tenancy exists.

Finally, even if a court determines that the tenant is not a holdover tenant and thus the landlord cannot recover any holdover rent premium from the tenant while the landlord completes the repairs, landlords are still typically able to recover the lost rent during this repair period (usually based on the fair market rental value during this period, regardless of what the rent is stated to be in the lease), in addition to recovering the reasonable cost of the repairs.

In sum, although most commercial leases contain holdover clauses, they are typically silent as to the potential holdover status of a tenant who leaves their premises in a significantly damaged condition. To reduce this ambiguity, and to avoid the costly litigation that would be required to get a court to make a finding either way, the parties should negotiate and include lease language that clearly states whether a landlord has the right to deem the tenant a “holdover tenant” if the tenant returns the premises in a state of disrepair at the end of the lease term.

John Fandel and Christal Harrison-Delgado are members of the Real Estate, Development & Construction practice group of Stoel Rives LLP. They are both based in Seattle.

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