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This article has been written by Nikita Arora pursuing the Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho. This article has been edited by Anahita Arya (Senior Associate, Lawsikho) and Dipshi Swara (Senior Associate, Lawsikho). 

Introduction

While renting their property to a tenant, a landlord will sign a real estate agreement. Among several clauses on the agreement, which will constitute the contract with the tenant, is a clause known as a “holdover clause”. The holdover clause, also known as the holdover rent clause, is one of the most significant terms to negotiate in a real estate agreement. This provision is critical for both landlord and tenants because it prohibits the former from re-letting the space while increasing the amount of rent a tenant pays.  In this article, we will look at how the holdover provision in real estate agreements works and why landlords and tenants should be concerned about it.

What is a Holdover clause?

This clause is included in most representation agreements to safeguard the brokerage. It often specifies that once the broker and client split ways, the client must pay the previously agreed-upon commission in a very specific condition and within a specific period. The carryover period is the length of time following the agreement’s expiration during which the commission may be payable.

What constitutes lawful tenancy by holding over?

According to Section 116 of the Transfer of Property Act 1882, the following conditions would result in tenancy by holding over:

  • After the lease granted to the lessee is determined, the lessee or under-lessee of the property retains possession.
  • The lessor or his legal representative either accepts rent from the lessee or under-lessee or agrees to the lessee or under-lessee’s continued possession. 
  • There isn’t any agreement to the contrary. In such circumstances, the lease is renewed on an annual or monthly basis, depending on the purpose for which the property is rented. Assume A rents out a house to B for five years. B rents out the house to C for Rs 5,000 per month.

The five-year lease expires, but C keeps the house and pays the rent to A. As a result, C’s lease is renewed on a month-to-month basis. Assume A rents out his house to B for the duration of C’s life. C dies, but B retains possession with A’s permission. B’s lease is renewed on an annual basis.

Buyers’ application

When an agent offers or shows a potential property to a client but the client does not sign a purchase agreement until after the business relationship has ended, the holdover clause kicks in. This might happen for a variety of reasons, including a change of heart, a glitch in finance, or the desire to strike a private arrangement. Whatever the reason, if the agent conducted the effort of identifying the property and the buyer purchased during the holdover period, the agent is entitled to a commission.

Sellers’ application

The deciding aspect for sellers is simply exposing the listed property to the eventual buyer. It makes no difference why the visitor visited the property or how he or she was introduced to it. If the buyer exhibited prior interest and then purchased after the listing expired, the agent is entitled to a commission. The holdover clause usually does not apply if the seller lists with another brokerage that charges the same or greater commission – no danger of undercutting the original agent. There is no quick or simple way to avoid paying a commission. The good news is that the holdover clause (like all contractual terms) is negotiable. So, make your best offer, both to interested parties and to the brokerage.

The holdover clause alters the length of the tenancy

The amount of time a tenant can detain and remain in the space is also determined by how the initial lease is drafted. For example, a company renting office space in New Delhi may have a holdover clause that states that once the original agreement expires, the lease becomes month-to-month at the new increased rent. If this occurs, the tenant will be required to provide adequate notice of its desire to vacate for the security deposit not to be forfeited. Other holdover clauses may require the tenant to leave after the lease, but if they do not, the lease becomes month-to-month at the increased rent. A third form of the holdover clause in a business lease may state that the tenant has no right to remain and that the lease does not turn month-to-month, but that if the tenant stays, he or she must pay a higher rent sum. The renter is working in the grey region in these final two instances. Even though the renter is paying a much higher rent, if the lease states that the tenant must depart and the tenant refuses to relocate and stays, the tenant may be trespassing on the landlord’s property.

How can tenants use a holdover clause to protect themselves?

When negotiating the original lease, tenants should pay special attention to the terms and conditions of the holdover clause. Unfortunately, tenants frequently fail to pay attention to the clause. They don’t find out what they’re responsible for until the lease expires. Extra expenditures may arise as a result of a significant rent increase, as well as damages caused by the tenant holding over and the loss of a new contract to a new tenant.

Here are four key factors that a tenant can negotiate into a holdover clause to create a win-win situation for both the tenant and the landlord:

  • Eliminate tenant accountability for any rent loss caused by the landlord’s inability to re-lease the space owing to a tenant stay. This is especially crucial in a strong leasing market, when landlords may be able to receive more for the property than the lingering tenant pays, even with a rent rise.
  • Negotiate a progressive scale for raising holdover rent. Instead of a 200 percent holdover rent increase commencing immediately, tenants may request a 125 percent increase in the first month, 150 percent in the second month, and so on.
  • Make certain that the holdover rent increase only applies to the ‘base rent’ element of the tenant rent. Tenants under leases pay a monthly base rent plus charges including utilities, property tax, building insurance, and common area maintenance. Applying the holdover increase just to the basic rent reduces extra rent expenses.
  • The landlord’s liquidated damages should be included in the holdover rent increase. In addition to paying a higher holdover rent, some stay clauses compel the tenant to compensate the landlord for damages caused by the holdover. By factoring in damages in the rent increase, the tenant can reduce its potential liability.

A holdover clause in an estate agreement allows rent to fluctuate

The amount by which the rent increases under a holding clause varies per agreement.  The rise can be as much as 150 percent, 200 percent, or even more. That means tenants who believe they can continue in the space and put off negotiating a new lease will be in for a rude awakening when the next monthly rent statement arrives. Assume a tenant was paying a gross rent of 1,000 rupees per square foot per year when his or her lease on a 200 square-foot space expired. If the tenant decides to employ the holding clause and remain in the premises without signing a new lease, the new rent might be 1,200 rupees or even 1,500 rupees per square foot. So the 500-square-foot space that was renting for 2,00,000 rupees per month when the lease expired now has a residual rate of 1,200 rupees to 1,500 rupees per month.

Sample holdover clause in a real estate agreement 

  1. If Tenant holds over after the expiration or termination of the Term without the written approval of Landlord, such tenancy shall be regarded to be on a month-to-month basis and may be terminated by Washington law. Tenant agrees to pay Landlord 125 percent of the lease holdover letter throughout such occupancy.
  2. If the Tenant extends the Term with the written approval of the Landlord, such tenancy shall be deemed a month-to-month tenancy, which may be terminated by applicable state legislation. During such tenancy, Tenant shall be bound by all of the terms, covenants, and conditions mentioned herein, except Basic Rent, which shall be one hundred fifty percent (150 percent ) of the Basic Rent due before the term’s expiration.

Conclusion

Real estate agreements contain numerous negotiable terms and conditions. Accepting the boilerplate phrasing of an agreement holdover clause can have a significant consequence when the lease expires and the tenant stays:

  • Holdover rent can rise by up to 150 percent, 200 percent, or more.
  • The length of tenure under a holdover provision varies from lease to lease; 
  • tenants may be subject to trespassing under specific circumstances.

As stated earlier, holdover rent terms are often enforceable and give a major incentive to renters to timely evacuate and relinquish the premises after the lease period. Thus, a landlord should generally not accept monthly rent payments from the tenant after the lease expires (unless the parties expressly agree that such payments may be accepted as use and occupancy, without prejudice), and especially should not do so without clearly stating that the tenant is holding over and that the landlord has the right to collect holdover rent. The penalties for a landlord acting imprudently can be severe, especially if the landlord foreclosed on a claim against the tenant for a huge amount of money.

References 

  1. https://www.riouxbakerteam.com/blog/selling-real-estate/holdover-clauses-and-you
  2. https://www.commercialcafe.com/blog/holdover-clause-commercial-real-estate-leases/
  3. https://www.myadvo.in/blog/send-legal-notice-to-vacate-premise-by-tenant
  4. https://economictimes.indiatimes.com/what-makes-tenancy-by-holding-over-valid/articleshow/3008347.cms?from=mdr
  5. https://www.commercialcafe.com/blog/holdover-clause-commercial-real-estate-leases/.

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