A holdover clause in a lease is designed as a safety mechanism in the event a tenant forgets to provide notice to renew or re-negotiate its lease, it is not a permanent solution.
We often see clients with leases that are in a “holding” state as the client is awaiting instructions or guidance on next steps, however this strategy potentially creates significant risk.
What holdover means
When a commercial lease expires without a new term agreed, most leases allow the tenancy to continue on a periodic (usually month-to-month) basis under the same terms. Rent and outgoings keep running. Your obligations under the lease, including maintenance, carry on as before. This is holdover, sometimes called a periodic tenancy.
It’s a standard clause in most commercial leases. The Law Association form (Cl. 40.1) or previously Cl. 36.1 in the former commonly used Auckland District Law Society form) includes it as a default provision, and in most leases this clause remains unaltered as drafted. In some cases, amendments are made, which we explain further below.
The practical mechanics are straightforward. Either party can terminate a periodic tenancy on notice, typically one month or 20 working days. However this cuts both ways. Your landlord can give you a month to vacate just as easily as you can hand back the keys.
What its designed for
A holdover provision is a helpful addition to a lease. As noted, in the case a tenant has forgotten to give notice or is uncertain on its future requirements, the ability to extend on a month to month basis is useful. For smaller tenants with limited fit-out, or for organisations that genuinely can move quickly, a short period in holdover while a new lease is documented makes sense. It bridges the gap without forcing a rushed decision and with needing to agree an short trm lease extension with the landlord. It’s a safety valve.
The problem is when short-term becomes long-term by default.
The slow drift into risk
We’ve watched organisations sit in holdover for six, 12, even 18 months – not by design, but because of a lack of planning and lack of urgency. In a soft market, the landlord is often happy to retain the tenant without having to find an alternative solution. Each month defers the problem. Then the landlord calls as eventually a longer term solution is needed for both parties.
A month’s notice to vacate commercial premises sounds reasonable until you’re actually having to plan and manage the exit. Finding suitable premises (office, retail, industrial or whatever), negotiating commercial terms, documenting the agreement and lease, fitting out the space, and physically relocating rarely compresses into four weeks. In our experience, depending on the scale of the premises, a well-run relocation process takes six – 12 months months as a minimum (and longer for larger sites) and that’s when you start the process with a clear brief and structured workplan.
Scrambling to move generates costs that were never in the budget: off-site storage, accelerated removalists and temporary solutions that often become more permanent as time ticks by. This lack of forward planning unsettles staff. And it puts your negotiating position with any prospective landlord on the back foot.
Read your holdover clause before you rely on it
Not all holdover clauses are equal. Landlords increasingly amend the standard form to charge a rental premium during the holdover period – sometimes 110%, sometimes 125% of the existing rent. The intent is transparent: make holding over uncomfortable enough that tenants commit to a new term. It’s a legitimate tactic, and if you haven’t read your lease recently, you may not know it applies.
Check the clause, check any deed of variation or amendment schedule, and know your numbers before you assume holdover is cost-neutral.
Don’t forget makegood
If your lease includes a makegood or reinstatement obligation – and many still do – that work needs to be completed before the final day of the tenancy. Not arranged, not quoted. Completed. Letting this run past expiry without landlord sign-off creates further cost and time risk. Build it into your timeline, not as an afterthought.
What to do instead
Start the conversation with your landlord earlier than feels necessary. If you want to renew, extend, or vary your terms, engaging three to six months before expiry gives you genuine options. Waiting until the lease is expired, or nearly so, hands negotiating leverage to the other side.
Specifically:
- Take a strategic view of your needs and how well your current premises meet these needs in the future, as this could initiate a process to consider alternative options or to require the landlord to upgrade your current premises
- Locate your lease (and any variations or renewal documents) and check the key dates for lease expiry, rent reviews and whether you have any remaining lease renewal options
- Also confirm whether the lease contains a holdover or periodic tenancy clause, what the notice period is for terminating by either party and whether the existing rent applies
- Diary your renewal notice dates – miss these and you may lose the right to renew entirely
- If you need more time, a new term, or different conditions, get in front of your landlord before the deadline, not after
- If you are considering alternative options, start a parallel process while asking the current landlord for a proposal to remain
Holdover is a useful clause to have in your back pocket. But it’s a poor substitute for a leasing strategy. The organisations that navigate lease transitions well aren’t the ones who move fastest under pressure – they’re the ones who saw the deadline coming and acted on it.
