The Real Deal - February 2012

Date: February 23, 2012

Collecting Holdover Rent Just Became A Little Harder
By: Erin O'Brien Millar & Thomas C. Barbuti

What does your lease provide with respect to a tenant holding over after the end of the term?  Does it clearly define what constitutes a “holding over?”  In the recent case of Carroll Indep. Fuel Co. v. Washington Real Estate Investment Trust, the Maryland appellate court addressed the contours of a tenant holding over in ways that may be different from what a landlord would expect.  Perhaps both landlords and tenants need to take a closer look at a clause that is not frequently heavily negotiated, but which also may be interpreted by courts in ways that the parties did not anticipate.

A tenant is holding over if the tenant’s actions amount to continued possession of the premises after expiration of the lease, which interferes with the landlord’s use or possession of the property.  In the Carroll case, the landlord argued that the tenant was holding over for three reasons:  (1) the tenant failed to remove an alleged subtenant from the premises, (2) the tenant failed to remove storage tanks from the premises, and (3) the tenant failed to provide the landlord with an inspection certificate upon termination of the lease.  The appellate court rejected all three of these arguments and overturned the lower court’s judgment in excess of $600,000 in holdover rent.

Failure to Remove Subtenant

Under Maryland law, it is clear that a tenant is holding over if a subtenant continues to occupy the premises after the lease is terminated.  In the Carroll case, however, even though the tenant (and the landlord) had notice that an automotive repair company was operating on a portion of the premises for several years during the term of the lease, the tenant had no contractual relationship with the company.  Accordingly, the court found that the alleged subtenant was a known trespasser, not a subtenant, and the tenant was not liable for holding over.

Most commercial leases contain a provision that requires the tenant to obtain the landlord’s consent before subleasing the premises.  In order to protect the landlord if an unauthorized occupant remains on the premises after the tenant’s lease has terminated, the landlord should demand a copy of the executed sublease or take steps to remove the unauthorized occupant as a trespasser in accordance with the wrongful detainer statute immediately upon becoming aware of the unauthorized occupant’s presence.

Failure to Remove Storage Tanks

The court in Carroll also found that failure to remove the underground gasoline storage tanks did not constitute holding over.  The lease at issue provided that the tanks that were installed by the tenant became the property of the landlord upon termination of the lease.  The tenant agreed to remove the tanks and continued to pay base rent during the removal, but the court found that the tenant’s agreement to remove the tanks did not change the ownership of the tanks under the terms of the lease.  The tenant’s failure to remove the landlord’s property did not render the tenant a holdover tenant.  The court did acknowledge, however, that there are some circumstances in which a tenant may be deemed to be holding over by leaving equipment or other property in the premises.

Many commercial leases provide that fixtures installed by the tenant and affixed to the premises become the property of the landlord at the end of the lease, but such provisions are often ambiguous.  There may be occasions when the landlord does not want the property for various reasons and does not wish to incur the cost of removal.  Thus, to the extent that the tenant intends to install equipment and fixtures in the premises at the inception of the lease, the landlord should take care to draft lease provisions that specifically identify which equipment and fixtures the landlord wants to become its property so that there is no dispute when the lease terminates.      

Failure to Provide an Inspection Certificate

The lease in Carroll also required the tenant to provide an environmental inspection certificate after giving back the premises to the landlord.  The appellate court found that a mere breach of the lease does not necessarily constitute holding over and that failure to provide an inspection certificate does not interfere with the landlord’s use of the premises and thus, does not constitute holding over.  The appellate court recognized, however, that there are some circumstances in which contamination of the premises may affect the landlord’s use and possession of the property and constitute a holdover.

What It Means for You

So the question is: does the “holdover” provision in your lease say what you intended to say?  This may be especially important if you are dealing with a tenant, like a gas station, which may cause contamination problems on or adjacent to the premises that interfere with the landlord’s use and possession of the premises after the tenant has vacated.  In gas station leases in particular, the landlord should make sure to clarify that the tenant will be deemed holding over and be required to pay holdover rent during any period that contamination exists on the premises or in the landlord’s land adjacent to the premises, whether or not caused by tenant, until the date upon which a “no further action letter” or similar government certificate is actually received by the landlord.

As a landlord, your holdover clause should probably also include an obligation that the tenant is responsible, at its sole cost and expense, for removing any person or entity, authorized or unauthorized by the tenant, from the premises who may have been on the premises prior to the termination of the lease and continues to occupy a portion of the premises thereafter.  The provision should provide that failure to remove the person or entity from the premises at the end of the lease constitutes a holdover and that the tenant is authorized to act as the landlord’s agent for the limited purpose of removal of the occupant, even after termination of the lease.