Franchisee Real Estate Lease: HOLDOVER

A holdover in a commercial lease occurs when a franchisee (tenant) remains in possession of the leased premises after the lease term has expired without a new lease agreement.

Contact Neufeld Legal PC for franchising legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

The complexity of the lease agreement for the commercial real estate that is used in the franchise operation can very easily equal, or even surpass, that of the franchise disclosure document and the franchise agreement, such that retaining the legal services of an experienced lawyer to decipher, explain and negotiate the commercial lease agreement and its schedules. And for over 25 years, we have been working with business owners, including franchisees, to understand and deal with commercial lease agreements that have been presented by landlords and are foundational to their business operations. To gain the most from our legal analysis and advice as to the commercial leasing arrangement, a franchisee would be well served to understand some of the most significant commercial leasing terminology, which we have undertaken to provide you with in-depth analysis.

A holdover in a commercial lease occurs when a franchisee (tenant) remains in possession of the leased premises after the lease term has expired without a new lease agreement. This situation is typically addressed by a holdover clause that defines the terms and conditions under which the franchisee (tenant) can remain on the property and the penalties they will face for doing so.

Key Provisions of a Holdover Clause

• Rent Multiplier: This is the most significant consequence of a holdover. The lease will state that if the tenant holds over, the rent will be increased to a multiple of the normal rent.

  • Common Multipliers: This is typically 150% to 200% (1.5 to 2 times) of the last month's rent. For example, if the normal rent was $5,000, the holdover rent would be $7,500 to $10,000 per month.

  • Purpose: The purpose of this significant rent increase is to strongly disincentivize the tenant from holding over and to compensate the landlord for the inconvenience and potential financial loss (e.g., losing a new tenant who was scheduled to move in).

• Tenancy Status: The holdover clause often specifies the type of tenancy created. Most holdover clauses state that a holdover creates a month-to-month tenancy at the new, higher rate. This gives the landlord the flexibility to evict the tenant with relatively short notice (typically one month).

• Liability for Damages: The clause will also often state that the tenant is responsible for any and all damages suffered by the landlord as a result of the holdover.

  • Examples of Damages: This can include lost rent from a new tenant who was unable to take possession, legal fees, or any other costs incurred by the landlord due to the delay.

What is the Significance of a Holdover Clause

• For the Landlord:

  • Control and Predictability: It gives the landlord a clear remedy and an incentive for the tenant to vacate on time.

  • Mitigation of Loss: The high penalty rent and liability for damages help to mitigate any financial losses the landlord might incur from a holdover.

  • Leasing Schedule: It protects the landlord's ability to lease the space to a new tenant without disruption.

• For the Tenant:

  • Budgeting: A tenant should be aware of the high cost of holding over. It is not an inexpensive option for getting a few extra weeks in the space.

  • Negotiating Power: A tenant should understand that holding over will significantly weaken their negotiating position for a new lease. A landlord has no reason to be flexible or offer a favorable new lease when the tenant is already paying a massive penalty rent.

  • Planning: The existence of a holdover clause underscores the importance of a tenant planning their move-out well in advance to avoid a costly situation.

Holdover vs. Lease Extension

It is critical for a tenant to understand the difference between a formal lease extension and a holdover.

• A lease extension is a mutually agreed-upon formal amendment or renewal of the lease. This is the proper way to remain in the space for an extended period, and it will be at a negotiated market rate, not a punitive, multiplied rate.

• A holdover is an unauthorized, unilateral action by the tenant. It is often seen as a breach of the lease agreement, even if the clause allows for it under certain terms.

In short, a tenant should never rely on a holdover as a planned strategy. It is a costly and risky last resort to be avoided at all costs by having a proper move-out or renewal plan in place well before the lease expiration date.

Naturally, how the concept operates in the specific context of the particular lease agreement requires experienced legal analysis, such that you make the most out of your understanding of the commercial lease agreement for your franchise. For such legal analysis and advice for your franchise and its commercial leasing arrangements, we welcome you to contact franchisee lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com to schedule a confidential consultation.

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Contact us via email at chris@neufeldlegal.com or call 403-400-4092 / 905-616-8864.