Congratulations – you’re the proud owner of a business!

One of the most important steps you will take in operating that business will be to lease out a space from which to sell your goods and/or services. In taking this step, the commercial lease signed with your landlord will become a crucial legal document in the management of your business.

This commercial lease will have a number of standard clauses, including a description of the leased premises, the rental payments, the term of the lease, possible term renewal options, and, in all likelihood, an overholding clause.

“Wait,” you say, “what’s an overholding clause?”

A typical overholding clause states that when the term of a commercial lease expires and the tenant continues to occupy the leased premises, the tenancy becomes month-to-month (usually at a higher rental rate.) That is to say, when a tenant remains in possession of the leased premises after the lease term has expired, or holds over, the tenancy continues on a monthly basis.

But, Proud Business Owner, it’s important to know that this not an unfettered right to remain on the leased premises for as long as you wish after your lease is up.

The Case

In fact, according to a 2012 decision issued by the Ontario Court of Appeal, AIM Healthgroup Inc v 40 Finchgate Limited Partnership,[1] you have no right to remain on the premises without the consent of your landlord.

The facts of this case were straightforward:

  • AIM Healthgroup Inc. was the Tenant who leased a space from which to operate a medical clinic. 40 Finchgate Limited Partnership was the Landlord.
  • AIM’s 5-year commercial lease was set to expire at the end of 2011.
  • Prior to the lease ending, AIM notified the Landlord that they would not be renewing the lease, but would likely need to remain on the premises for a few additional weeks.
  • The Landlord advised AIM that they would need vacant possession of the premises when the lease expired.
  • The lease expired.
  • Having secured a new tenant, the Landlord changed the locks and disposed of AIM’s property.
  • AIM brought an emergency application seeking permission to re-enter the premises, citing the overholding clause in their commercial lease. They pointed to the fact that the clause did not specifically say that Landlord consent was required.
  • The application judge granted AIM the application.
  • The Landlord appealed the decision.

Ontario Court of Appeal: AIM has no right to remain on the premises

In her decision, Justice Feldman concluded that the application judge had improperly granted AIM’s emergency application.

In order for the overholding clause to apply and the tenancy to continue month-to-month, consent of the landlord must have been granted – even where that language is not expressly included in the clause. Consent can be either explicit (i.e. in writing) or implied (i.e. the acceptance of rent).

She gave 2 primary reasons for coming to this decision:

  • Leading texts and case law have consistently interpreted overholding clauses as requiring landlord consent.
  • It would be commercially unreasonable for a landlord to allow for unilateral tenancy extension by the tenant – they would only have one month’s notice to secure another (potentially more lucrative) tenancy!

Conclusion

So, Proud Business Owner, be cautious about relying too heavily on the overholding clause in your commercial lease if you’re opting not to renew. You’re only allowed to hold over if your landlord has given their consent, expressly or impliedly, for you to do so. Otherwise, you’ve got to be out of there!

Take-Aways

  • An overholding clause states that a tenant may occupy the premises on a month-to-month basis once their commercial lease has expired.
  • Case law has confirmed that landlord’s consent must be granted for a tenant to continue to occupy the premises on a month-to-month basis.
  • Tenants should ensure that their landlord agrees to the tenant occupying premises on a month-to-month basis.

 

Commercial lease documents coming soon to the Clausehound Small Business Library!

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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