Renewal Options and Holdover Tenancies: Common Fights in Commercial Leases

Renewal options: why the notice is everything

An option to renew is a unilateral right the landlord has granted the tenant. Because the landlord gets nothing further for it, Texas courts treat the conditions attached to it as strict: the tenant must exercise the option in the manner and within the time the lease prescribes, and substantial compliance is generally not enough. A notice sent a week late, sent by email when the lease requires certified mail, sent to the property manager when the lease names the landlord's lender-approved notice address, or signed by a subtenant rather than the tenant has been held ineffective.

Courts have occasionally granted equitable relief from a late exercise where the delay was slight, the landlord was not prejudiced, and forfeiture would cost the tenant valuable improvements, but that relief is the exception, and a tenant should not plan on it. The practical rule is that the option is lost unless the lease's terms were met.

The conditions that trip tenants

• The window. Many options may be exercised no earlier than 12 months and no later than 9 months before expiration. Notice outside either end can be ineffective.
• No default. Most options require that the tenant not be in default at the time of exercise, and sometimes at the start of the renewal term as well. A landlord that wants the space back looks hard for a default in the file.
• Occupancy and assignment. Options are often personal to the original tenant and lapse on assignment or when the tenant occupies less than a stated share of the space.
• Form and delivery. The lease's notice clause governs. Keep the proof of delivery.
• Rent. An option at fair market rent needs a mechanism: brokers' opinions, an appraisal, arbitration. An option that leaves rent to future agreement, with no standard or method, risks being an unenforceable agreement to agree, which Texas courts will not fill in.

A landlord who wants to resist a renewal usually argues one of these conditions failed. A tenant who wants to hold the landlord to it should be able to produce the notice, the delivery receipt and a clean ledger.

What happens when the tenant stays past the term

A tenant who remains after the lease ends without an exercised renewal or a new agreement is a holdover. Three sources of law decide what follows: the lease's holdover clause, the Property Code's rules on terminating tenancies and evicting, and the common law of tenancies at sufferance and at will.

Holdover rent

Most leases provide that a holdover tenant becomes a tenant at sufferance or a month-to-month tenant on the lease's terms, at a stated multiple of the final rent, commonly 150 or 200 percent, and often make the tenant liable for the landlord's consequential damages, such as the loss of a replacement tenant or payments to that tenant for delayed delivery. Texas courts enforce holdover rent clauses as agreed rent for the period of occupancy. Whether the consequential damages clause is enforceable is examined under the ordinary rules for liquidated damages and foreseeability, so a landlord must be able to prove the loss and its connection to the holdover.

When the landlord keeps taking rent

A landlord that accepts regular rent after expiration without objection may create a month-to-month tenancy on the lease's terms at the old rent, waiving the holdover premium for that period. Landlords who want to preserve the premium reserve it in writing when accepting payments; tenants who want to argue a month-to-month tenancy point to the landlord's silence.

Ending a month-to-month tenancy

Property Code § 91.001 governs. A month-to-month tenancy may be terminated by either party giving notice to the other. If the rent-paying period is a month or longer, the tenancy ends on the later of the date stated in the notice or one month after the notice is given. If the tenancy ends on a day that is not the beginning or end of a rent period, the tenant owes rent only through the termination date. Under § 91.001(e) these rules give way where the parties have signed a written agreement providing a different notice period or no notice at all, or where there has been a breach of contract recognized by law. A lease holdover clause that says the tenancy is at sufferance and terminable on three days' notice therefore controls over the one-month default.

Eviction

Property Code § 24.002(a)(1) provides that a tenant who willfully and without force holds over after the termination of the tenant's right of possession commits a forcible detainer, and § 24.002(a)(2) adds a tenant at will or by sufferance. The landlord must make written demand for possession that satisfies the notice to vacate rules in § 24.005, then file in justice court. The steps and timing are set out in how commercial eviction works in Texas. A landlord evicting for holdover must also have complied with the tenancy termination requirements of § 91.001 where they apply.

Example

Suppose a Frisco retail tenant's lease ends June 30 and gives an option to renew for five years by written notice delivered by certified mail no later than nine months before expiration, provided the tenant is not in default. The tenant's controller emails the property manager on October 15, within the window, saying the tenant intends to renew, and hears nothing back. In April the landlord signs a letter of intent with a national tenant for the space and tells the existing tenant the option was never exercised because the notice was not sent by certified mail to the notice address. The tenant stays past June 30 while it looks for space; the holdover clause sets rent at 200 percent and makes the tenant liable for the landlord's delay damages to the new tenant. The tenant's best arguments are that the landlord's conduct waived the delivery method or that the email was a sufficient writing under the notice clause, and that the landlord cannot both deny the renewal and collect holdover rent without first terminating the tenancy at sufferance by the notice the lease requires. The landlord's position is that strict compliance was required, that it reserved the holdover rent in writing when it accepted July's payment, and that the delay payments to the new tenant were foreseeable when the clause was signed.

What each side should do now

Tenants: calendar the option window from the day the lease is signed and exercise early, in the exact form the lease requires, keeping delivery proof. If the deadline has passed, propose a new lease in writing immediately; many landlords prefer a paying tenant to a vacancy. If you must stay past the term, get a written holdover agreement fixing the rent and the exit date, since a tenant who holds over without one takes the lease clause as written. A tenant that wants out rather than in should read whether a business can break its commercial lease.

Landlords: respond to any purported exercise in writing, stating whether it is accepted or defective and why. If a tenant holds over, send a written notice reserving holdover rent before accepting any payment, give the termination notice the lease or § 91.001 requires, and then the notice to vacate under § 24.005. Document every cost the delay causes with the incoming tenant. The lease's other remedies for a tenant in possession after default are covered in commercial lease disputes in Texas.

When to involve a litigator

For a tenant, as soon as a landlord says the option was not validly exercised, because the arguments for waiver or substantial compliance depend on acting before the landlord commits the space to someone else. For a landlord, before the first post-expiration rent check is deposited. Tina Wysk represents landlords and tenants in renewal, holdover and possession disputes in Dallas-area justice, county and district courts through the firm's real estate litigation practice.