Recent U.S. Postal Service Board of Contract Appeals Decision Sheds New Light on “Holdover” Damages Available to Government Lessors

Pillsbury Winthrop Shaw Pittman LLP

Pillsbury Winthrop Shaw Pittman LLPFinding: Government tenants that overstay their leases are liable for damages on several grounds.

  • A lease holdover of indefinite duration by a government tenant can entitle the lessor to recover a rental “premium” for the entire period of the holdover.
  • The legal principle that applies in awarding holdover damages—like condemnation proceedings—is to make the owner of the property whole.
  • The period of holdover rent can extend beyond the date of the actual holdover when the government tenant fails to provide timely, advance notice of the date it intends to vacate the premises.

For many years, lessors of space to the federal government have struggled with the remedies available to them when the government continues to occupy the space after the expiration of the lease. Such “holdover” tenancies occur with some frequency, and the courts and boards have adopted disparate views with respect to the damages available to the lessor for such a holdover tenancy.

A recent decision by the U.S. Postal Service Board of Contract Appeals, issued on May 6, 2019, sheds new light on this area of government contracts law. SeeNationwide Postal Management v. U.S. Postal Service, PSBCA No. 6645 (May 6, 2019). The case involved a 20-year lease for the U.S. Post Office in Wyandotte, Michigan. The U.S. Postal Service (USPS) continued to occupy the premises after the expiration of the lease on April 30, 2015, thus leading to a holdover tenancy. As is often the case, there was no “holdover” clause in the lease. The issue in the case concerns the damages to which the lessor was entitled based on the USPS holdover for a period of more than two years.

In its decision, the Postal Board first determined—consistent with existing law—that the USPS holdover “breached the duty implied in the lease to vacate the premises at its expiration.” Slip op. at 8. Second, the Postal Board determined that the remedy of eviction was not available to the lessor (an issue with which almost all courts agree). Third, the Postal Board determined that “rent in comparable leases” could be used to determine the “reasonable value” of the property for the holdover period. Id. at 10. Fourth, after considering the conflicting views of the parties and their experts, the Postal Board adopted lessor’s position that the “uncertain duration of the holdover requires application of a rental ‘premium.’” Id. at 11. This holding is significant, as it recognizes the indefinite duration of the holdover as a factor in determining damages necessary to make the lessor whole. Finally, in determining the precise length of the holdover period the Postal Board determined that “a holding-over government occupant owes a duty to notify the owner before it vacates, ending the holdover.” Since the USPS failed to provide notice until after it vacated the premises, the USPS was liable to pay reasonable, fair market value rent through the entire month during which it vacated the premises, even though it actually vacated the premises on the second day of the month.

Holdover tenancies often leave lessors in difficult situations in the real estate marketplace, particularly where, as here, the duration of the holdover tenancy is open-ended and uncertain. This case recognizes that government tenants must pay a financial premium when their holdover tenancies fall outside the realm of commercial reasonableness

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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