When drafting a lease agreement, many landlords include a “holdover rent” provision forcing tenants to pay additional rent if they remain in tenancy past the lease term. The provision could require a tenant to pay anywhere from two to three times their stated rent for each month they remain on the premises. New York courts have found these provisions valid as the landlord’s rights to liquidated damages. However, a New York County Supreme Court decision issued in October decided that a landlord can engage in actions that would render the provision invalid.
In Hamilton 65th Partners v. Smallbone Inc., the landlord included a holdover provision requiring the tenant to pay rent in the amount of 2 ½ times the last monthly rent for each month they remained at the premises past the one year agreed upon tenancy. If enforced, the landlord would have been entitled to recover $3 million in holdover damages. However, because the landlord acted inconsistently as to the tenant’s status, the court found the provision did not apply.
In the case, the defendant Smallbone, Inc., agreed to rent the first and second floors of a Manhattan building from Hamilton 65th Partners. After the lease expired in March 2010, Smallbone remained at the premises for another 4 years until March 2014. In 2014 Hamilton commenced a holdover proceeding against Smallbone. In the holdover proceeding to establish ownership. Hamilton was recognized as the owner of the premises, and Smallbone was recognized as a month-to-month tenant. There was no mention of holdover damages in the claim. In July 2015, Hamilton commenced the current action against Smallbone to collect the holdover damages as per the lease.
Smallbone moved to dismiss the action against them because (1) they are a month-to-month tenant after the lease expired pursuant to Real Property Law § 232-c, and (2) Hamilton is judicially estopped from denying Smallbone’s status as a month-to-month tenant, because it previously asserted they were in a prior holdover proceeding.
Real Property Law §232-c states that if the landlord accepts rent for any period after the expiration of the term, an acceptance is implied that the parties are engaging in a month-to-month tenancy, unless there is another agreement providing otherwise. The court quickly dismissed Smallbone’s argument under the statute, because the lease had a clear holdover provision which would satisfy the express agreement criteria.
However, the court decided to dismiss the action on Smallbone’s second argument. Because Hamilton had held Smallbone to be a month-to-month tenant in the prior holdover proceeding, they were judicially estopped from claiming they are holding over now. During the last proceeding, Hamilton made no claim that Smallbone was holding over, or that they were entitled to damages due to a holdover. Furthermore, because Hamilton continued to collect rent without asserting its right to collect holdover rent, the court found a “clear manifestation of intent to relinquish a contractual protection.” Therefore, the landlord is now unable to claim damages for a holdover.
After the decision in Hamilton, landlords should be conscious of the fact that their actions can affect their enforcement of a holdover provision. While the provisions are still enforceable, landlords should not act in a way that could imply they have extended the tenant’s lease on a month-to-month basis. Thus, landlords should generally not accept monthly rent payments after the expiration of the lease unless they clearly assert the tenant is holding over and they are entitled to collect holdover rent. The failure of a tenant to do so, may result in significant losses as was the case in Hamilton.
Negotiating a lease agreement of office, retail, and commercial spaces can be difficult. The law office of Georgaklis & Mallas PLLC is experienced in various areas of real estate-related transactions. The firm’s skilled attorneys handle both commercial and residential transactions on behalf of lending institutions, real estate investment and management companies, business and individual clients. If you are an owner or tenant of retail or commercial spaces and negotiating a lease, call us today at (718) 238-2400 or (212) 779-2400.