This is a transcript of an episode of the LeaseSmart Podcast.
Bradley: Hey, this is Bradley! We’re here at LeaseSmart and we have Craig Melby with us and we’re talking about commercial leases. Craig, could tell us something sort of peculiar or interesting that’s happened in the office these days.
Craig: I do leases all day every day and I’m constantly surprised with the new issues that come up. The one that struck me just in the last couple of days was called a Holdover Clause. Every Landlord Lease has a Holdover Clause and what it’s for is if the tenant stays beyond the term of the lease. Staying beyond the term is not necessarily good for the landlord because they may need to get that tenant out because they may have a new tenant that is ready to move in, so there needs to be a penalty. If you stay late, you have to pay more money. That’s their pressure to get you to move out. So, that’s all well and good.
Many times a lease penalty will be Double Rent, and many times while you’re negotiating that initial lease, you can negotiate that way down just by asking. A lot of tenants will think “Who cares? That’s not going to be a problem.” And, many times it’s not a problem. But sometimes it can wreck financial devastation and there’s just no reason not to get that Holdover Penalty reduced. It’s a simple matter of just asking but if you ignore it, it’s at your own peril.
For instance, last week I had a situation. I was negotiating a new deal for this client and he didn’t leave himself quite enough time to move into this new space between permitting and planning, etc. So the Holdover Clause became very important to the transaction. His Holdover Clause happened to be the worst one I’ve ever seen in my career. What he had in there was the rent would double the first month that he went beyond his lease and then it would go up 25% every month thereafter. The problem was he may be able to get out of the space in time and into the new space but many communities, many municipalities, counties, cities whatever, they can be real sticklers on permitting. And so at the end of the day, he just couldn’t take the chance that he may end up happen to be in the space an extra 2 or 3 or 4 months and it would wreck him.
He was unable to move to better space and expand his business because he couldn’t take the risk of the Holdover Clause. Now in this case I could tell you that the landlord did not have another tenant lined up to take the space so there was no real damage to the landlord but he wasn’t about to waive that because he really wanted the tenant to stay and used it as leverage. It’s like “Well too bad. You’re gonna have to pay your penalty if you go beyond the date.” It was a stand off to some degree and the tenant ended up having to stay. He could not suffer the risk so he had to renew his lease in an inferior location and it affected his business model and his future. It was something that was completely avoidable had he thought about it.
B: So if I had a lease and I was looking for this Holdover Clause, I’m sure it’s not called Holdover in the contract?
C: Many times it is. It is called exactly that. They may have other names but it is in every lease and like I have mentioned, it’s an important, reasonable clause but it doesn’t need to be crazy either. Some landlords won’t ask for double rent, but many times they do and they always in my experience, will reduce it simply by asking.
B: It’s there fundamentally to make sure the property owner has someone in the building in that space all the time right? So, it takes away the leverage that the tenant currently has.
C: Let’s look at it from the landlord’s point of view. If I’m the landlord and you, the tenant, have told me you’re going to be leaving at the end of your lease, that’s great. I’m going to start looking for a new tenant right away and ideally I would have a new tenant moving in the day after you move out. That tenant maybe counting on that space. Maybe they’re in some other space and maybe they’ve given their landlord notice. They might have hired all kinds of employees and managers to operate this business. It can be a problem if a tenant is ready for the space and someone else has not vacated it. So it makes sense that some penalty is certainly appropriate. In this case, this tenant of mine would have been able to pay a 20% penalty. That would have been fair enough. He would have done the deal. He maybe would have had to stay an extra month or 2, pay the penalty happily and everything’s fine, but double rent that goes up 25% every month was just too risky.
B: So, let’s talk about this in a practical sense. If I’m a business owner and I’m looking at one of these leases and it’s got one of those clauses in it and I’ve got to figure out how to negotiate that, what’s the best way to do that?
C: It’s really quite simple. You have to remember that when you’re doing a new lease, everybody’s happy with each other as well they should be and probably will continue to be.
So, when you’re looking at that space, you’re telling the landlord, “You know we’re looking at other spaces but you know under these terms we would go into your space and by the way this Holdover Clause is too much.” Many leases are 3 years, 5 years, 10 years whatever long so the landlord is not going to be worried about being put into the situation 5 or 10 years from now. Usually a landlord does not have a tenant that is going to take a space immediately once it’s vacant. It’s simply a matter of asking. Looking at the lease, I see time and time again if the tenant is inexperienced with this, their eyes glaze over. This is kind of in the boiler plate. They don’t even think it’s a negotiable item so they just skim over it. Most of the time that won’t matter. Most of the time they won’t have to be holding over beyond their term, but it can happen and it can be a real serious issue and I have run across a few times where it turned into a serious issue. All you got to do is ask. When you’re negotiating all the other terms in the lease and there are many of them, this is just one. If the lease says your rent’s going to double in Holdover then that’s when you say well we understand there should be some penalty, but that’s ridiculous. We’ll pay 20% increase and I have never had trouble in getting a landlord to reduce it down, many times to 20%, sometimes to zero for the first X number of months. We understand the concept, it needs to be in there but it doesn’t need to be nearly so brutal.
B: Well it’s great. I mean it’s obvious you have some really good practical experience in getting the things negotiated. If other people wanted to get a hold of you, what’s the best way the can do that?
C: I’m easy to reach. LeaseSmart.com or my phone number is 800-962-2419. We do this all over the country with other tenant rep partners so wherever you are, we’re happy to step in and help you negotiate your lease.
B: That’s great! Thanks a lot!
C: You’re certainly welcome.