Commercial Landlord Not Entitled to Double Rent Under Holdover Statute Where Tenant Had Legitimate Belief It Had Right to Possess Space – IL 1st Dist.

I’ve written on here before about how a tenant holding over after a lease expires can lead to a serious case of option paralysis for the landlord.  Questions abound in rapid-fire fashion: should the landlord accept the holdover and continue the lease on the same terms as before? Should the landlord seek double rent under the forcible statute?  Should the landlord refuse to cash any rent checks from the tenant after the lease expires?  What if the landlord desperately needs that post-expiration rent payment?  These are all issues that need to be addressed.  And fast. 

Spatz v. 2263 North Lincoln Corporation, 2013 IL App (1st) 122076, a somewhat dated but relevant case, examines the requirements for a holdover tenancy and the features of an enforceable option to purchase in the context of a commercial lease dispute.

That case’s plaintiff, a successor property owner (to the original landlord), sued the commercial tenant for eviction and past rent damages. The tenant defended the suit, and argued that it exercised an option to purchase the premises from the plaintiff’s predecessor before the lawsuit was filed and therefore was immune from eviction.

The trial court sided with the plaintiff awarding it possession and rental damages but only awarding about half of its claimed attorneys’ fees. The court also denied plaintiff’s request for double rent under Illinois’ holdover statute (735 ILCS 5/9-202).  Both sides appealed.

Affirming the possession order, the appeals court rejected the defendant’s argument that it exercised a purchase option on the property and was therefore a property vendee rather than a lessee.

In Illinois, where a lease contains a purchase option, and the option is exercised and accepted according to its terms, there is no longer a lease.  What results instead is a present contract for the sale of the property.  The parties relationship then morphs from a landlord-tenant one to a vendor-vendee one.  The lessee (now the vendee) then has no further lease obligations.

However, the lessee must exercise the option to purchase to the property in exact conformance with the option. If it fails to do so, the option is deemed unexercised and the landlord can pursue rights under the lease. (¶¶ 27-28).

Here, the court found that the lessee’s purported acceptance of the purchase option was too conditional to be considered a proper exercise of the option.

The court next held that the lessor failed to extend the lease or create a holdover tenancy by accepting partial rent payments from the tenant after the lessor served its 30-day termination notice.

Under Illinois law landlord-tenant law, it is the landlord’s intention, not the tenant’s, that determines whether a holdover tenancy is created. While a landlord’s acceptance of rent following the expiration of a lease can be viewed as an intent to treat a tenant as a holdover, a court objectively looks to landlord’s other conduct – such as efforts to regain the premises – to determine whether the landlord intended to treat a tenant as a holdover. (¶ 37)

The lease specifically allowed the landlord to accept post-default rent payments without extending the lease.  In addition, the landlord sued to evict the defendant. Taken together, this served as clear evidence of a landlord’s intent not to treat the tenant as a holdover.

The First District also affirmed the trial court’s denial of the plaintiff’s claim for double rent under Section 9-202 of the Forcible Statute.

This statute allows a landlord to recover double rent where a tenant willfully holds over. The statute is penal in nature and only applies where a tenant stays in possession in bad faith – basically where it knows it has no right to stay after the lease ends. (¶¶ 44-45).

Where a tenant stays on site “for colorably justifiable reasons” (i.e., under a reasonable claim of right), the landlord cannot recover double rent under the willfully holding over statute. (¶ 44)

Here, the tenant offered evidence at trial showing that it had a legitimate dispute as to whether it had a right to stay in possession after lease expires. Consequently, the appeals court affirmed the trial court’s finding against the landlord on the double rent issue.

Afterwords:

1/ An option to purchase must be exercised in strict conformity with the purchase option;

2/ For a lessor to recover double rent under the holdover statute, the lessor must prove the lessee’s willfull conduct: that the lessee refused to vacate the premises without a good faith basis for doing so;

3/ 30-days’ written notice is required to terminate a month-to-month tenancy.

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PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.