Thursday, July 30, 2009

You Got to Know When to... Holdover and What it Will Cost


In general terms, a holdover occurs when a tenant maintains possession or occupancy of leased premises, past the expiration date of the lease agreement. Absent a provision in the lease, a landlord may treat a holdover “tenant” as no tenant at all, but as a trespasser, and initiate eviction proceedings (after Ohio’s “Statutory 3-day Notice”). Alternatively, absent lease language, a landlord can treat the holdover as a tenant, and hold that person to a new lease term. The conduct of the parties determines whether or not an implied contract to lease arises, and the landlord’s acceptance of rent is usually the conduct considered to be conclusive proof of a new tenancy.

How long is the new tenancy for? In Ohio (and many other jurisdictions), the general rule is that a tenant who holds over, can do so for a term equal to the term of the original lease, provided the period is for one year or less. For example, a tenant with a lease for six months would be entitled to a new six-month lease, but a tenant holding over after an expired five year lease would be considered a month- to-month tenant (unless, that tenant offered six months of rent in advance, which was accepted by the Landlord, thus establishing a new, periodic, six month tenancy). What is created as a new periodic tenancy, however, may not last that long, at least when a commercial landlord/tenant in involved.

The right of a Landlord to terminate a commercial, periodic tenancy prior to the end of its periodic term was reinforced by the Supreme Court of Ohio in Maggiore v. Kovach, 101 Ohio St.3d 184, 803 N.E.2d 790, 2004-Ohio-722. The specific issue in Maggiore was whether one month's notice was required to terminate a commercial month-to-month periodic tenancy. The Court acknowledged that Ohio Revised Code Section 5321.17 requires a landlord or tenant in a residential periodic tenancy to give seven days notice to terminate a week-to- week tenancy and thirty days for a month-to-month tenancy. However, the Court in Maggiore found that R.C. 5321.17 applies only to residential leases. As such, it concluded that commercial landlords are not required to give tenants thirty days notice to terminate a month-to-month periodic tenancy. The court found that the only notice necessary was the three-day notice required by R.C. 1923.04 in forcible entry and detainer actions.

The final determination in a holdover situation is price (i.e., rent). If the lease is silent, courts would look again to the action of the parties. If the tenant pays the same rent as called for in the original lease and the landlord accepts it, the original lease rent would be the amount due for the holdover period. On the other hand, if the landlord calls for rent in addition to the original lease rental, the holdover tenant would not be liable for the difference if the tenant dissents and fails to pay the increase. See Steiner v. Minkowski, 72 Ohio App.3d-754 (1991).

The Eleventh District Court of Appeals in Brunswick Limited Partnership v. Feudo et al., 171 Ohio App.3-369, 2007-Ohio-2163, recently confirmed Ohio’s general rule regarding holdover rent, when a commercial lease is not silent- the rent is what the lease says it is.

The landlord and tenant in Brunswick, both agreed that a rate of double the minimum rent, plus any additional rent was expressly designated “holdover rent” in the lease. According to the tenant in Brunswick, however, a holdover clause providing for double rent is unconscionable and should not be enforceable. According to the landlord in Brunswick, a provision calling for double rent during a holdover is not an illegal penalty provision, or an unconscionable provision, but an enforceable liquidated damages’ provision.

The Court in Brunswick agreed with the landlord, by first reiterating the general law regarding rental agreements. Quoting Ohio Revised Code Section 5321.05, the Court stated that “a landlord and a tenant may include in a rental agreement any terms and conditions, including any term relating to rent, the duration of an agreement, and any other provisions governing the rights and obligations of the parties that are not inconsistent with or prohibited by Chapter 5321 of the Ohio Revised Code or any other rule of law.

The Court in Brunswick also distinguished a previous decision of the 11th District (Village Station Associates v. Geauga Company, 84 Ohio App.3d (11th Dist. 1992) that held a specific holdover clause in a commercial lease providing for double rent to be unconscionable and unenforceable. The Court in Brunswick distinguished the Village Station case on the basis of differing facts. The issue in Village Station was whether the double rent called for in the Village Station lease should accrue for the nine day holdover period, or for thirty days, since the Village Station lease contained confusing language indicating that a holdover tenant would be a “tenant by will and by sufferance, on a month-to-month basis”. The Village Station case interpreted the holdover provision as creating a tenancy at-will, not a month to month tenancy, and therefore, the tenant was only obligated to pay double rent for the nine day holdover period.

The Court in Brunswick did acknowledge that evaluating whether a holdover provision constitutes an illegal penalty provision or a valid liquidated damages provision will depend on the facts and circumstances of each case. However, the Court in Brunswick reiterated that Ohio Revised Code Section 5321.06 is the overriding legal principal applicable in these cases.

As a practical note, the landlord in Brunswick crafted a holdover provision that landlords and those representing landlords may want to follow. The Brunswick holdover provision was as follows: “if Lessee . . . shall remain in possession of all or any part of the Premises after the expiration of the term of this Lease, no tenancy or interest in the Premises shall result therefrom but such holding over shall be an unlawful detainer and Lessee shall be subject to immediate eviction and removal, and Lessee shall pay upon demand to Lessor during any such period which Lessee shall hold the Premises after the term has expired, as rent for said Premises, a sum equal to all items of additional rent provided for in this Lease plus an amount computed at the rate of double the minimum base rent for such period.” The Brunswick language clarifies that there is no tenancy whatsoever, and sets the amount due for any holdover time. Tenants, on the other hand, will want to draft language to the effect that a tenancy from month-to-month is established, at the same rate as the original lease.

The overriding morale of the story to these cases is “Watch your language with holdover provisions and penalties in commercial leases.”

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