July 19th, 2011, By Dana Haugh
In a typical lease negotiation, the parties, the attorneys and the brokers focus only on the key financial aspects within the lease document. However, there are subtle and seemingly innocuous clauses that can cost the tenant a pretty penny long after the lease has been signed. Here’s a quick list of 5 Dangerous Lease Clauses:
3. THE HOLDOVER CLAUSE
The Holdover Clause is another one of those clauses that is hard for a tenant to focus on at the inception of the lease. No one likes to think about the possibility of moving out later than the lease stipulates! However, the holdover penalty that most landlords ask for is between 150-200% of the escalated rent, can make for significant penalties.
It is understandable that landlord wants the tenant to leave on time because the once the lease comes to an end, they are trying to secure another tenant for that same space. However, this clause can lead to a subtle, but potentially far more significant, liability for the existing tenant holding over in the space- that of consequential damages.
For example, assume that Tenant “A” is at the end of their lease term, but because their next landlord is late on delivering their new space, they are late in leaving the existing space- thus holding over. Suppose though that the landlord has secured Tenant “B” for the space with a $3 million lease. Tenant “B” may have their attorney insist the landlord perform by a certain date, or else Tenant “B” would have the right to cancel their $3 million lease. If you’re Tenant “A”, the Holdover Clause opens the door for consequential damages. It is possible, if not probable, that the landlord will SUE you for the loss of the $3 million tenant.
Typically we are successful in negotiating a fair compromise for our client that allows the landlord to recover some holdover penalty, in a phased-in manner, only after a 30-day grace period. Furthermore, we always seek to limit consequential damages to after a 90-day period of holdover. This way, we protect our client’s (the tenant’s) position without putting the landlord in jeopardy.
Protect yourself— watch out for the Holdover Clause.