For many reasons, things don’t always go as planned. A pandemic happens, there is a shortage of available commercial space, or a new space is not ready to be occupied by a tenant. When this happens, a commercial tenant may find it has no place to move to and is unable to vacate its current leased premises upon the expiry of its lease.

A commercial tenant that has overstayed its recently expired lease is not in a great position, however, the risks of such a situation can be mitigated with a well drafted lease agreement.

 A carefully negotiated lease should contain a provision that addresses this situation, often referred to as an “Overholding” clause. Overholding is a term that describes when a Tenant remains in its leased premises beyond the expiry of its lease term.  

A well-drafted overholding clause will not permit a tenant to remain in its leased premises indefinitely, but it will set out the terms and conditions in the event the tenant remains in the leased premises following the expiry of the lease term. Key terms in an overholding provision include: the rental amount; whether the terms of the expired lease continue to govern; the required time to terminate the lease; and whether the landlord consents to the overholding.

The overholding rental rate:

Section 58 of the Commercial Tenancies Act (Ontario) provides that, when a tenant willfully holds over, the rent shall be 200% of the rate set out in the lease. Despite this, landlords and tenants will often negotiate a lesser rate, typically 115 to 150% of the rate set out in the lease.

Do the terms of the expired lease still govern?

Normally, an overholding provision may state that the terms of the lease will continue to prevail during overholding except for the rental amount and that there is no express renewal or extension of the expired lease.

When does overholding end?

An overholding provision should be clear on how an overholding period may be terminated. Typically, it will state that the lease will continue on a monthly basis following the expiry of the lease. If there is no mention of this month-to-month basis, the common law may deem the tenancy to be an annual one requiring one year’s notice to terminate the overholding period.

Will the landlord continue to accept the tenant’s rent?

Despite any overholding clause, if a landlord does not consent to the tenant overholding and does not accept the tenant’s rent, the tenant is not entitled to remain in the leased premises (AIM Health Group Inc. v 40 Finchgate Limited Partnership, 2012 ONCA 795). Conversely, if a landlord accepts rent from a tenant that is overholding, the landlord is deemed to have consented to the overholding.

Key takeaways

Landlords and tenants can both benefit from overholding provisions. From a tenant’s perspective, the tenant can remain in the premises for a short period and a Landlord can benefit from increased rent if the premises would otherwise remain vacant. However, overholding provisions will fall short if they do not include the overholding rental amount, whether the expired lease terms continue to govern, whether overholding continues on a monthly basis, and ultimately, whether the landlord consents to the overholding.

Tenants should not rely on overholding as an absolute right, however, a properly drafted overholding clause may afford a tenant some protection in the event they remain in a leased premises without a proper lease in place.

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