The best time to leave a property is upon expiration of the lease term, but there is always room for negotiation.
Several months ago, a client (the tenant) had a lease that was close to expiration. The tenant was about to sign a lease for a different space, but something happened: Another property came on the market, they looked at it and decided it was much better suited for their business. However, starting all over in the negotiation process would have put the tenant over their current lease expiration date. In order to acquire the new space, the tenant would have to extend their current lease, or pay a penalty.
This real-life example posed two interesting questions:
- When should a tenant stop looking at space?
- When does a lease actually end?
The answer to the first question is: “Never stop looking.” In a market as large as New York, there will always be new listings. Until the lease is signed and the deal has been approved, look at every new space that comes on the market.
Simply stated, the answer to the second question is: “The lease ends when the tenant moves out.” In the above scenario, Mohr Partners successfully negotiated for an extension of the tenant’s current lease.
Most leases contain a provision called a “holdover provision.” A holdover occurs when the tenant continues to occupy or remain in possession of the leased property after the lease has expired. When the tenant goes into a holdover situation there is often a penalty, generally 150% of the current rent.
Ideally, the landlord and tenant can often agree on a short-term extension or they can renegotiate the holdover period.
As a last resort, the tenant can simply holdover and pay the penalty, but that comes at a risk. If the landlord has a new tenant waiting to move in, that tenant has the right to sue the current tenant in holdover for damages.
A New York law firm signed a lease for an office space. The tenant occupying the space (also a law firm) overstayed their lease. The law firm whose plans were delayed had significant damages as a result. They sued the holdover tenant for damages incurred as a result of the breach and won.
In this type of market, a tenant should negotiate for an extension, then there is no potential liability from third-party beneficiaries to the lease. But, regardless of what it says on paper, the lease ends when the tenant leaves and returns the key to the landlord.
Have you read your holdover provision?
George E. Grace
Mohr Partners, Inc.
232 Madison Avenue
New York, NY 10016