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De Facto Holdover

By Paul R. Diamond and Dara Sahebjami
October 29, 2008

Imagine a potential industrial tenant visiting a property only to discover workers in hazmat suits in the midst of an environmental remediation project; or the impact of having a prospective tenant find building code violations or lingering evidence of flood damage. Not exactly the ideal scenario for a landlord looking to market its property, but not an unheard-of circumstance, either. The reason is that too often, surrender provisions in today's commercial leases are not adequately coordinated with the landlords' marketing needs, and lack adequate remedies to ensure compliance by tenants at the end of their lease terms. A continuing stream of rental income is the key to the success of any commercial property and it is critical for landlords to take proactive steps to protect the continuity of that income. Landlords can do just that by requiring tenants to comply with some of their typical “surrender” obligations well before the end of their lease terms, by viewing non-compliant tenants as de facto holdovers and invoking remedies traditionally applied when a tenant fails to move out at the end of its lease term.

Because it takes time to find a new tenant, commercial leases generally include a number of clauses designed to give the landlord the opportunity to minimize any interruption in that stream of rental income caused by the transition between tenants. For example, the landlord is usually permitted to post “for rent” signs and show the premises to potential new tenants during the last year of the term so the landlord can identify a new tenant before an existing tenant's lease expires. Also, the existing tenant is usually required to “surrender” the premises in good condition at the end of its lease term in order to minimize the time and expense for the landlord to prepare the premises for a new tenant. If the existing tenant does not vacate the premises at the end of its term, the landlord can usually declare the tenant a “holdover” in order to collect damages and charge the tenant a multiple (usually 150% or 200%) of its rental rate until the tenant vacates the property.

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