July 30, 2015

The Thin Line Between Holdover and Renewal

Whether you are a commercial tenant or landlord, the issue of lease renewal versus lease extension can impact your business enormously. Recent Indiana cases have reaffirmed that understanding your leasehold obligations can mean the difference between a routine short-term lease extension and a potentially disastrous long-term financial obligation.

In the past, the line separating a holdover tenancy from a lease renewal was fairly clear. For the most part, and if permitted under a lease, a holdover was formed by a tenant who simply chose to remain in the rental premises after lease termination and to continue paying rent. If the landlord accepted the rent, a holdover was born.

If, on the other hand, the tenant wished to renew the lease for an additional term and a renewal was permitted under the lease, the tenant was usually required to give notice of that election to the landlord. Typically, the requirement for notice was strict, i.e., made within a specified period of time, in writing and sent in a specific manner. If the notice was given as required, the lease was renewed for the period agreed upon in the lease.

Actions Speak Louder Than Words

Recent Indiana cases have re-examined this issue, and it now appears that in certain situations a tenant may be considered to have renewed its lease regardless of whether it gives the requisite notice and regardless of whether it actually intended to renew. In Norris Ave. Professional Building Partnership v. Coordinated Health, LLC, 28 N.E.3d 296 (Ind. Ct. App. 2015), the Indiana Court of Appeals found that, despite failing to give any notice to the landlord, a tenant had effectively renewed its lease for an additional five-year term.

While the tenant made no affirmative election to renew its lease, it did remain in the premises after lease termination and it did begin to pay the higher rental rate required under the lease renewal provision. The court determined that the tenant had manifested its intent to renew rather than hold over by paying the higher rent payments required for a lease renewal. Moreover, since the notice provision was for the benefit of the landlord, the landlord could waive that provision by accepting the higher rent and allowing the tenant to remain in the premises. Thus, the parties’ actions demonstrated intent to renew, which the court found sufficient to create liability for the remainder of the five-year extension period.

Plan Ahead

Unintentional renewals can have disastrous results for all parties. Whether you are a landlord interested in future development or a tenant who wishes to relocate to a more desirable location, planning and strict lease compliance is vital. Renewal provisions typically require substantial notice prior to execution. It is imperative to review lease provisions and identify next steps well in advance of the lease termination date. Most leasing missteps can be avoided by careful planning and clear communication.

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