A Holdover clause is common in a commercial lease. Basically it states that if the tenant does not vacate the space until after the termination date, they are responsible for a specific amount of additional rent. A holdover penalty is usually between 2 and 3 times the last (escalated) rent.

At first glance it seems like a high number, but keep in mind that it’s hard to predict the real estate market.  If a tenant signs a 10 year lease starting at $10,000 per month with 3% escalations, they will be paying about $13,000 per month at the end of the lease. If the real estate market has gone up 60% over those ten years (certainly not unprecedented), the tenant could stay in the space on a month-to-month basis at a below market rent indefinitely.

It’s not unusual for a landlord and tenant to extend a lease for a few months after a lease for a rent that they both think is fair, but if the holdover penalty does not exist, the landlord is put in a bad position since the tenant has less of an incentive to be proactive or communicative about extensions.

The holdover penalty is also high primarily to discourage holding over and encourage tenants to be communicate if they need extra time, not to generate more profits for the landlord.

If one tenant’s lease ends on September 30, and there’s a prospective tenant that wants to sign a lease on the space for November 1, the landlord needs to be certain the outgoing tenant moves out on time or at minimum, tells him that they are not.

Holdover clauses can garner extra attention on below-market subleases.

Below is an example of a holdover clause:

In the event Tenant remains in possession of the Demised Premises after the termination of this Lease, Tenant, at the option of Owner, shall be deemed to be occupying the Demised Premises as a tenant from month-to-month, at a monthly rental equal to 200% of the sum of (a) the monthly installment of Fixed Rent payable during the last month of the term and (b) one-twelfth (1/12th) of the Additional Rent payable during the last year of the term, subject to all of the other terms of this Lease insofar as the same are applicable to a month-to-month tenancy.