Overholding

Sometimes, the unexpected can occur. Someone gets sick, a big contract falls through, or renovations of a new space go awry – for whatever reason, a tenant may find itself unable to vacate its premises on the termination date of its lease term.

A well-drafted lease should contain a clause that governs ‘overholding’ (also referred to as ‘holding over’), the term used to describe staying beyond the termination date of the lease. An overholding clause does not provide permission to a tenant to stay beyond the end of the lease. Instead, it merely sets out the parameters for such over-staying in the event that the tenant does not vacate the premises on time.

A good overholding clause will deal with the terms and conditions that govern the overholding period, how much rent is payable during the overholding period, and the notice period for terminating the overholding period. It will also deal with the issue of landlord consent.

1.  No renewal: terms and conditions that will govern the overholding

An overholding clause may state that, in the event of overholding, either the terms and conditions of the lease no longer govern the parties (i.e. that there is no tacit renewal or extension of the lease or term), or that the terms and conditions of the lease continue to govern the parties. It is a good idea to indicate which of these will be the case. Typically, the lease no longer governs.

2.  Rate

The Commercial Tenancies Act (Ontario) provides that, in the event a tenant holds over, the rent shall be 200% of the rate set out in the lease. In many overholding clauses, however, the parties will agree to a lesser rate, typically 125 to 150% of the rate set out in the lease

3.  Time to terminate

A good overholding clause should state that the tenancy will be deemed month-to-month. In the absence of stating this expressly, and depending on the length of the original term, the common law could deem the tenancy to be an annual one, thereby requiring one year’s notice to terminate the overholding.

An overholding clause can be even more specific than labeling the tenancy ‘month-to-month’. It can state that the tenancy is month-to-month and that 30 days’ notice is required for notice of termination. This prevents a tenant from arguing that a month means a full calendar month such that any notice given after the 1^st of a month requires a full calendar month to pass in order to be effective (so that notice given on January 2^nd, for example, means that termination won’t occur until February 28^th). The parties thereby have certainty as to exactly when notice must be provided to effect a termination.

4.  Consent laws

In the event a landlord does not consent to the overholding, then a tenant cannot remain in the premises. Merely including an overholding clause in a lease does not provide the tenant with a basis for claiming that overholding is with the landlord’s consent (AIM Health Group Inc v 40 Finchgate Ltd Partnership, 2012 ONCA 795).

It is well established law that if the landlord accepts rent from the tenant for its overholding, the landlord is deemed to have consented to the overholding.

Subsequent conduct can modify presumptions regarding consent. For example, if the landlord and tenant enter into a separate agreement for the overholding period that modifies the overholding clause in the original lease, then the amendment will govern the parties (Bayer Inc v Belfield Investment Corp, 2015 ONSC 5029).

In another case, a tenant claimed not to be overholding though it left substantial refuse in the premises. The court found that the tenant was considered to have been overholding – and therefore responsible for paying rent – until the refuse was cleaned up (1400 Castlefield Road Inc v Threadcount Inc, 2015 ONSC 1751).

A landlord can benefit from a tenant overholding by collecting higher rent than the premises would ordinarily support, especially if the space might otherwise be empty. A tenant can benefit from overholding if it needs to remain in its old premises as a stop-gap measure. At the same time, overholding can also be to a landlord’s or tenant’s detriment if the parties do not share the same understanding as to (1) the governing terms and conditions, (2) the rate of rent payable, (3) period of time, or (4) consent to the overholding.

So, if you ever find yourself in an overholding position, we hope you have a four-leaf clover for luck – or a well-drafted overholding clause.