Landlords (Tenants), You Lie In Wait At Your Own Risk

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We came across a recent Texas Court of Appeals Memorandum Decision validating a “double rent” holdover lease provision. It held that the “doubling” was a contractually agreed-upon rent, and not an unenforceable penalty as the tenant had argued. If the light from this candle we’re using tonight holds up, we’ll return to that central holding of the case.

The nice thing about the court’s June 28, 2013 opinion in Khan v. Meknojiya, 03-11-00580-CV (Tex. Ct. App. 3rd Dist. 2013) [a copy of which can be seen by clicking HERE], is that the facts aren’t very explicit. Why, then, do we say “the nice thing”? That’s because it allows us to make them up. And, when we do so, you can’t say we’ve gotten them wrong because, by definition, they are right. Nonetheless, we’ll try to stick our own “story” inside what you’d see in the court’s opinion if you were to look at it.

Meknojiya was tenant under a 1996 lease that was renegotiated in March, 2002. The renegotiated rent was $4,500 per month. That lease had a “holding over” provision calling for double the prior “base rent.” More importantly for our “story,” within a month or so, the landlord sent a default notice to its tenant. In that notice, the landlord “elected” to terminate the lease effective May 1, 2002. The nature of the alleged defaults weren’t all that important, either to our story or to the landlord. We say that because all the landlord actually did after May 1, 2002 was to send periodic default notices. In fact, the tenant remained in occupancy for a little less than five years, vacating the premises on January 2, 2007, the stated lease expiration date. It paid the rent every month until then.

Apparently, getting the $4,500 a month wasn’t good enough for the landlord because, after January of 2007, it sued for the “holdover” double rent from when it “terminated” the lease in 2002 through when the tenant left (on what would have been the lease termination date.) That’s about five years.

[For those of you dying to know how this ended up, we’re positioned to disappoint. As of when the Texas Court of Appeals made its ruling, there was no decision on the holdover issue. What happened was that the lower court originally threw out the landlord’s claim by holding that the double-rent holdover provision in the lease was an unenforceable penalty. Thus, the merits of the landlord’s claim were never reached. The Court of Appeals then overturned the lower court’s ruling. To that upper court, this wasn’t a question of “damages,” “liquidated damages” or “penalties; it was a case where the lease itself included a rent “increase” for the tenant if the tenant chose to remain in the space after the end of the lease’s term. Given that a big bunch of states have laws that call for double rent upon a holdover, Ruminations doesn’t even understand why the court thought this was an “unenforceable” penalty. There’s a lot of public policy seemingly saying otherwise. Be that as it may, the case is back in the hands of the lower court to decide if this was, in fact, a holdover tenancy. We’re far from certain that it was. If you’re curious why, take a look at an earlier blog posting about holdover tenancies by clicking HERE. ]

First, we apologize to H. L. Mencken. Since “no one ever lost money underestimating the intelligence” of the courts, we sure hope the lower court sees this for what it is: the landlord trying to “have his cake and eat it too.” [For those as troubled as we are with the illogic of that word order, look at this source material as reported on Wikipedia: “An early recording of the phrase is in a letter on 14 March 1538 from Thomas, Duke of Norfolk to Thomas Cromwell, as ‘a man can not have his cake and eate his cake.’”]

Basically, the landlord, having enjoyed a steady stream of rent checks for five years, waited until the natural expiration date of the lease before trying to pounce. Assuming the landlord was “right” in early 2002 when it purported to terminate the lease, it might have been “right” had it pursued the claim at that time or, each time it accepted rent, it notified the tenant that it had to leave and also that the rent check was short by half. In our making up the missing “facts,” none of that happened. That’s because had the landlord enforced the lease termination (and, we’ll assume that it was a valid exploitation of a “conditional limitation” remedy, it valued the monthly rents more than a couple of months of double rent in 2002.

As long as we’re back to the “facts,” and in case you’d like to get a better impression of the landlord, here were the March – April, 2002 “defaults” behind the landlord’s lease termination: (a) the tenant failed to obtain or renew required insurance; (b) the tenant failed to provide the required insurance documentation; and (c) the tenant allowed other people to operate the tenant’s convenience store. Apparently, these were important to the landlord at $4,500 a month, but not at $9,000 a month or, in the alternative, these issues were resolved. No comment.

Now, here is the Ruminations take-away.

If landlords are serious, why do they sit on their hands and wait? The same could be said of tenants, but tenants don’t have as many opportunities to do the “lie in wait” routine. We were surprised to see the Texas case’s particular situation. We’re far more accustomed to seeing the following scenario: A tenant is routinely late with its rent payments, perhaps for years. Then, the money runs out and the landlord evicts that tenant for non-payment of the last two months’ rent. In many states, if a tenant bellies up to the bar with the past-due rent, the eviction has to end. That’s called redemption, and in most of those states, you can’t bargain away that right. So, to raise the bar, if for nothing else, the landlord lards its “unpaid rent” claim with “old sins.” It reaches back to long forgotten “late charges” and other fees. Yes, it increases its claim by the late fee it never pursued from six years earlier and adds interest to that fee.

Landlords, here’s a tip. Judges aren’t that dumb and the law supports smart judges. If you sit on your hands – if you don’t pursue a claim on a timely basis – the court is going to find a way to dismiss your claim. Whatever rationale a particular judge decides to use as the “legal” basis for doing so (sometimes needing to be clever to stay within the precedential ruling in that jurisdiction), the real basis will be that the claim was “waived.” You will have been found to have abandoned your claim. It won’t matter that the lease has a “no-waiver” provision, because you will have been found to have waived the benefit of that “no-waiver” provision. [If you want to see a Ruminations blog posting on that, click HERE.]

Landlord (and to a lesser degree, tenants), here’s a “million dollar” tip. If you get too cute by half and decide to play the wait and then pounce game, you stand a good chance of losing. And, it could cost you substantial attorney’s fees to find that out and get a lesson on why. If you have an issue, pursue it up front. Did we say attorney’s fees? Here, when the lower court originally held for the tenant on legal grounds (not having reached the merits), the landlord was tagged with the tenant’s $60,000 in legal fees. The appellate court gave the landlord a reprieve when it reversed the lower court. We predict that to be only temporary relief because, when the tenant prevails after a full trial, the landlord will probably be facing twice that or more. Even if this were pursued on a “contingency fee” basis, who is going to pay that tab?

While we’re at it, we’ll throw out another variation of the wait and pounce game. We’ve lost count of how many times the phone has rung and the landlord at the other end of the line says some variation of the following. “My tenant is three months behind in the rent. What should I do?” We always say: “Evict the tenant.” Here’s the most common response: “But, if I evict the tenant, I’ll have an empty space.” The best we can offer in reply is the following. “You don’t have a tenant; you have a guest. A tenant is one that pays rent. Your guest is keeping you from renting to someone who will pay rent.” What happens? Well, most of the time the next call is four months later when the same landlord says: “That tenant now owes seven months’ rent. Get it evicted for me.” The longer you wait, the greater is the risk that your available remedies will be worthless (and we’re talking real money here).

There is another take-a-way from this little Texas case. It is about something called “conditional limitation.” That’s something landlords like and tenants shouldn’t. We’re not going to “go into it” today because it is too important and too complicated to tack onto today’s simple message. But, it has relevance to the “holdover” claim made by this Texas landlord. If the alleged defaults in 2002 were actually defaults and if they weren’t cured in the allowed-for time period, and the landlord sent the proper notice, the lease ended without any judicial intervention. This doesn’t mean the landlord can send in a couple of heavies from Jersey to end the tenant’s possession, but it does mean that the tenant can now be evicted (be deprived of its possession of the leased space) by reason of no longer having a lease, not by reason of being in default. If the lease (or the jurisdiction) demanded only judicial termination of the lease, there would be no possible holdover claim until a court ended the tenant’s right of possession because the lease would have remained in effect even if the tenant was in default. This distinction has particular significance in bankruptcy situations, but all of this “conditional limitation as a remedy” talk must be left for another day.

If any reader is still waiting to argue on behalf of the Texas tenant against the landlord’s holdover claim in the first place, connect those thoughts and comments with our blog posting on holdover tenancies, not here. Ruminations encourages comments and a good way to post them is to find the “comment” link just below the posting’s title, and use it.

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Comments

  1. Tenants – if you’re doing a lease in Texas and there are landlords out there that would pull such a stunt, guard yourselves in the lease exactly like Ira says. A holdover should arise only after a judicial award of possession to the landlord.

  2. Anthony Cafaro Jr. says:

    Ira’s scenario of a holdover month to month tenancy where a landlord seeks the increased rental nearly five years later is a rather atypical example of how a ‘holding over’ provision in a lease practically comes into play. From the Landlord’s perspective, a holdover provision whereby the rentals are increased (typically an additional 25%-100%) forces the landlord and tenant to sit down and negotiate a new deal. Without such a provision, a tenant can take its time and ‘test the waters’, so to speak at the expense of the landlord. In nearly every instance when a tenant and landlord negotiate an extension (even if the lease amendment isn’t signed by the natural expiration date), most landlords and tenants agree to make the new amendment retroactive to what otherwise would have been the expiration date thus negating the holdover rental terms in lieu of the newly negotiated rental terms. Without holdovers, as Ira points out, the only leverage a landlord has is to seek an eviction. To me that seems extreme for a landlord to have to spend money to evict through court proceedings at the end of a lease term. Here’s a likely scenario: a tenant’s natural lease expiration is August 31st. The tenant informs landlord that it does not intend to renew its lease, but will stay through the end of the year to benefit from the increased business during the holiday season. The landlord otherwise could rent this space to another tenant at an increased rental rate. Without a holdover provision, there is virtually no reason for the tenant to vacate at lease expiration because its knows that it will be next to impossible (in most states) for a commercial landlord to evict its tenant who otherwise is paying some form of rental (albeit, a rental rate less than what landlord could get from a replacement tenant). The squatter tenant is depriving the landlord of an economic benefit. Holdovers aren’t all bad or intended to be a ‘gotcha’ as used in the Texas example. There are legitimate business reasons why every landlord should insist on such provisions in all of their leases. Again, the tenant bargained for a defined lease term – nothing more and nothing less.

    • Anthony is absolutely right. I say this from the perspective of someone who learned our business from the tenant side, watching his mentors negotiate with Anthony’s grandfather. Mr. Cafaro, his colleagues and my masters at Woolworth were tough, fair and colorful men. They believed leases should be straightforward expressions of mutually agreed upon business terms, that required no outside eyes for interpretation. In those days, arrangements lasting decades were expressed in a dozen pages, and they worked just fine. I’m so grateful to have learned these lessons early, from such great sources.

      When I moved to the landlord side of the table, I noticed that the holdover clause was often the first thing leasing agents crossed out, to get a lease signed. My role was to explain to everyone that the provision was indeed a penalty clause, a deterrent against potentially devastating damages under certain circumstances. In practice, the penalty was routinely waived, so long as good-faith renewal negotiations were underway.

      Underlying these practices is the idea that the landlord tenant relationship is not competitive. It is or should be collaborative and synergistic.

      Be transparent, keep things simple, put it in writing and stay on top of things. It’s really easy that way. And if conflict cannot be avoided, don’t fight, at least not at first. Find someone who understands the business principals and mechanics of leasing, and let them bring peace and sense to the situation. Courts rarely do that.

      Happy Thanksgiving.

  3. Jim Henegan says:

    Holdover rent is typically applied because the Tenant has stayed in possession after the end of the Term or termination of the Lease preventing the Landlord from being able to re-lease the Premises with any certainty. The whole point is to encourage the Tenant to give up possession as soon as possible so that the Landlord can re-lease the space.

    It is a very odd case for the Landlord to terminate the Lease by a default notice and then take no action for 5 years to recover possession of the Premises. Based on the facts that we have been told, it would not be unreasonable for the Tenant to assume that the Landlord had changed its mind about terminating the Lease given that it allowed the Tenant to remain through the end of the Term.

  4. If After receiving a judgement how does the LL intend to collect?

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