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Holdover Tenancies

Holdover Tenancies

A “holdover” tenant refers to a tenant that remains in the leased premises after the term of the lease expires.  One of my litigator friends in another state recently encountered the following situation:

Tenant and Landlord originally entered into a 60 month commercial lease at $12,000.00 per month base rent.  With 6 months remaining in the term, Tenant and Landlord began negotiating an extension of the lease, and Tenant also shopped around to find another space in case it could not reach an agreement on the extension.  As the expiration of the term approached, Landlord and Tenant agreed that Tenant could remain at the premises under the same rent on a month-to-month basis.  Tenant continued to shop around and simultaneously negotiated for an extension.  After 8 months had passed with Tenant as a holdover tenant, Tenant found a new space and informed Landlord that it would leave at the end of the following month.  Soon thereafter, Landlord sent Tenant an invoice for $96,000.00 for past due rent.

The original lease contained a provision that stated Tenant must pay 200% of the base rent during any holdover period.  For the prior 8 months, Tenant was only paying 100% of the base rent, so it owed the other half.  Landlord made three primary arguments to support its position: (1) the agreement to continue with the same base rent was not put into writing and therefore was unenforceable, (2) Landlord’s acceptance of lower base rent for 8 months did not prevent Landlord from later collecting the base rent specified in the lease, and (3) even if the oral agreement was enforceable, the continuation of the base rent rate was conditioned upon the parties reaching an agreement on an extension.  The court agreed with Landlord on point #1, and Tenant was instructed to pay the past due base rent along with Landlord’s attorney’s fees (which were $40,000.00).

The provision that a tenant must pay 150% or 200% of base rent during any holdover period is common in landlord commercial lease forms.  First, a tenant should be sure to negotiate the holdover rent to 100%-110% when negotiating the lease.  The landlord still has the ability to require the tenant to leave at the end of the term.  The holdover rent should be a mutually agreed upon amount.  Second, before entering a holdover period, a tenant should review its lease for provisions regarding holdover tenancies.  Third, if the parties agree to different terms than those stated in the lease (even if after the lease term expires), the parties should put those terms in writing.

In Arizona, in the absence of a holdover provision in the lease, the tenancy is month-to-month and continues with the same rent (see A.R.S. 33-342).  Either party may terminate a month-to-month tenancy with 10 days notice to the other party (see A.R.S. 33-341).

Prior to using any language or concepts from this blog entry, consult with an attorney.

Ryan Rosensteel is a real estate and construction attorney licensed in Arizona.  You can contact him at rrosensteel@rrlawaz.com.


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