§ 24.03 Holdover and Expansion Options

• Jurisdiction: United States
• Publication year: 2022

§ 24.03 Holdover and Expansion Options

Apart from renewal options, a tenant may have several other options at its disposal. A tenant realizing the possibility that it may need to remain in the premises beyond the original lease term will want to have an option to holdover. A tenant interested in expanding will want to obtain an expansion option.

[1]—The Holdover Option

There are times when a tenant must remain in the premises beyond the term of its lease. Sometimes a new lease takes longer to negotiate than anticipated. The preparation of the new location can fall behind schedule or other problems may arise. In such instances, the tenant will want the right to holdover pursuant to a holdover option.¹ As with other options, the holdover option provision should be negotiated beforehand and prices and time periods should be agreed upon in advance.

The common law doctrine of holdover tenancies has led a number of states to enact statutes abolishing the rule. Under the common law rule, if a tenant stays in the space beyond its term without the landlord's permission, the landlord can either elect to regard the tenant as a trespasser, i.e., as a tenant at sufferance, or as a holdover tenant, for a month or perhaps for a year.²

Some states have adopted statutes on the subject of holdover tenancies. New York, for instance, provides that in the case of a holdover tenant with an original term of more than one month, the landlord has two choices. It can either evict the tenant or accept the tenant and create a month-to-month tenancy.³ This statutory remedy is more lenient than the common law rule prevailing in many states where a holdover tenant may be deemed a tenant from year-to-year, at the landlord's option.⁴ However, statutes vary from state to state and a tenant may find it wise to negotiate terms under the contract in case it needs additional time at the end of its lease term.

In at least on instance, a court held that a tenant, who failed to give a landlord proper notice, held over and paid the increased rent that was specified in the option for an entire year after the lease had expired, had effectively exercised its lease option. The landlord's acceptance of the increased rent established that the parties had extended the lease and the notice requirement had been waived. The following clause is a fairly common example of the way a holdover tenancy is treated in a lease:

Example 4:

Section 24.01. Holding Over. If Tenant shall, without the written consent of Landlord, hold over after the expiration of the Term, and if Landlord shall then not proceed to remove Tenant from the demised premises in the manner permitted by law, such tenancy shall be deemed a month-to-month tenancy, which tenancy may be terminated as provided by applicable law. During such tenancy, Tenant agrees to: (a) pay to Landlord, each month, the greater of the fair market rental value for the Premises or two hundred (200%) percent of the fixed annual rent and all additional rent payable by Tenant for the last month of the Term; and (b) be bound by all of the terms, covenants and conditions herein specified. In addition, Tenant shall indemnify and hold Landlord harmless from any direct, indirect, consequential or subsequential costs or expenses due to Tenant's holding over.

Such a clause avoids having the holdover governed by common law standards, including the creation of a tenancy at sufferance, which is the equivalent of trespass. It also creates terms, rent and potential penalties for a tenant if its holding over delays another tenant's moving into the premises.

The parties can negotiate different terms than those contained in the example above. The month-to-month tenancy may, for example, give rise to a short term (e.g., six month) extension with month-to-month renewals thereafter. The holdover rent can go down to 150% or 125% of fair market value or the last month's rent instead of being 200% of fixed annual and additional rent. Finally, the penalties may be less than in the example.

Landlords rarely deviate from the penalties stated in the example above. However, an owner may face similar penalties to a new occupant if it is delayed in using the space. The new tenant may even be able to cancel its new lease if the previous tenant's holding over substantially interferes with the new tenant's moving into the premises. If under the new tenant's lease, the landlord only agreed to a "tender of possession" on a certain date rather than an actual "possession" on that date, the remedies against the landlord drop dramatically, leaving the new occupant with only an action in ejectment against the holdover tenant and no contractual cause of action against the landlord.

[2]—The Expansion Option

Tenants who expect their businesses to grow at the location should ask for expansion options. If the tenant is planning to grow, he or she will want to have the right to expand—to acquire additional space in the building. The terms of such expansion rights should be spelled out clearly in the lease. For example, the lease should address how and when expansion is permitted, what type of notice must be given and how far in advance must such notice be given to the landlord. What are the terms applicable to the landlord? When must the space be delivered, etc. What will be rental amount be, how will it be determined? How much additional space will be involved? Are there restrictions in terms of location within the building—only contiguous space, space on the same floor? If space becomes available, can the tenant take as much of it as he or she wants or will the tenant be required to lease the space on an all or nothing basis...