Recent world events haven’t exactly been kind to either tenants or landlords. The worldwide lockdowns resulting from the COVID-19 pandemic have led to radical shifts in commercial real estate. Millionacres reported that high-end commercial districts have seen precipitous drops in cash flow in New York, while Daily Business Review stated that some commercial property types in South Florida have watched their transaction values halve on a year-over-year basis.
However, those aren’t the only ways in which experts have seen a COVID-19 impact on commercial properties. Landlords have begun reporting increase rent-abatement requests from tenants. What exactly is rent abatement? What is its relationship to rent relief? Can it help landlords? And when is it appropriate for a tenant to seek it? This post will answer all these questions and more.
What is Rent Abatement?
On its simplest level, rent abatement is a lease clause that allows tenants to not pay their rent given certain circumstances. However, as with many real estate provisions, the devil is in the proverbial details. What rent abatement looks like in practice, the amount of money returned to the tenant, and who exactly bears the associated costs varies from case to case.
Some rent-abatement clauses front load the landlord’s financial obligation, removing rent expenses for the tenant’s first few months. Others only come into play given certain disasters. (See the section “When Is It Appropriate to Seek Rent Abatement?” below.) The amounts and durations depend on the terms negotiated prior to the signing of the lease — a theme we will return to again and again in this post.
Benefits of Rent Abatement for Landlords
At first glance, tenants might seem to receive all of the benefits from rent abatement. Landlords, though, also derive advantages from rent-abatement clauses, the primary one being that they differentiate their particular properties from others in the market. While rent abatement represents a potential expense for landlords, it may also help them secure a steady, stable tenant in the long run.
Are Rent Abatement and Rent Relief the Same?
Rent relief isn’t quite the same thing as rent abatement, although it’s related. Rent relief typically breaks down into two categories: rent abatement and rent deferral. While the former involves complete erasure of a rent obligation for a particular period, the latter doesn’t. Rent deferral simply involves the delaying of rent expense until some future period.
Also, note that any form of rent relief may not include the all-or-nothing payment of some monthly sum. At times, rent relief may include the abolition or postponement of only part of the total sum. Why? While extraordinary circumstances may tax tenants, landlords rarely realize full relief from the totality of their expenses and negotiating partial rent abatement can aid with ongoing property repairs, pandemic-related sterilization services, and the like.
When Is It Appropriate to Seek Rent Abatement?
There are a number of relatively common lease clauses that a tenant might invoke when seeking rent abatement. One of the most likely is a force majeure clause. According to the law firm of McDermott Will & Emery, “Force majeure is a contractual defense that allows a party to suspend or discontinue performance of its contractual obligations under specific circumstances.” The firm goes on to state that “a global pandemic such as COVID-19 (or its downstream effects and consequences) will likely qualify as a force majeure event if the provision specifically includes references to a ‘pandemic’ … [O]ther more generic “catch-all” provisions pertaining to “disasters,” “acts of God,” “national emergencies,” “government regulations” or “acts beyond the control of the parties” may be asserted to allege that COVID-19 and its downstream effects or consequences are indeed force majeure events.”
Does that mean that a landlord must provide rent abatement if a tenant invokes a lease’s force majeure clause? Not necessarily. Stroock & Stroock & Lavan LLP notes, “Force majeure clauses typically require rent payments, even in the face of events outside of the tenant’s reasonable control that prevent the tenant from performing its other obligations under a contract. Thus, even if the COVID-19 pandemic qualified as a force majeure event under a commercial lease, rent likely is still due.” Of course, the specific language of your lease will largely determine whether or not an invocation of force majeure is appropriate.
Other clauses might also come into play when a tenant seeks rent abatement. One such might be a casualty clause, a kind of clause that might allow for abatement given some kind of disaster. However, these sorts of clauses typically only apply to events that physically damage the premises. And although some tenants may seek rent abatement by citing eminent domain during this pandemic, claiming that the government has “seized” their property though mandatory closures, this is quite a novel legal interpretation.
In the end, if tenants find themselves struggling, there’s nothing that stops them from simply asking for rent abatement and seeing how their landlord responds.
How much does Rent Abatement Cover?
At its most expansive, rent abatement can cover all of the monthly rent due. It could also cover just a portion of the rent expense. Some types of rent abatement are even amortized across the entirety of a lease, effectively granting tenants a permanent rent reduction. Note, though, that the time to consider just how much rent abatement will cover comes when you’re negotiating your lease, not after you’ve signed it. By then, its breadth is essentially carved in stone.
Do All Commercial Leases Provide a Rent Abatement Clause?
Most of the lease clauses mentioned above will appear in commercial leases — but not all. Similarly, exactly what they cover and how they may apply to a particular situation may vary dramatically. So, yes, many commercial leases will contain verbiage that may allow for rent abatement. But it’s difficult to apply general knowledge to specific situations without particular knowledge about an individual lease agreement.
If you’re trying to navigate difficult rent-abatement issues, let us help. GNP Realty has the expertise and experience to help with all aspects of commercial real estate management. Contact or call us at (312) 329-8400 to see how we can aid you.