The worldwide lockdowns resulting from the COVID-19 pandemic led to radical shifts in commercial real estate. Millionacres reported that high-end commercial districts saw a steep drop in cash flow in New York, and Daily Business Review stated that some commercial property types in South Florida watched their transaction values halve on a year-over-year basis.
However, those weren’t the only ways COVID-19 impacted commercial properties. Landlords reported increased 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.
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What is Rent Abatement?
On its simplest level, rent abatement is a lease clause that allows tenants not to pay their rent given certain circumstances. However, as with many real estate provisions, the devil is in the details. What rent abatement looks like in practice, the amount of money returned to the tenant, and who bears the associated costs varies from case to case.
Some rent abatement clauses frontload the landlord’s financial obligation, removing rent expenses for the tenant’s first few months. Others only come into play given certain disasters. (See “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.
How Is Rent Abatement Calculated?
Rent abatement calculations can vary depending on the terms negotiated between the landlord and tenant in a commercial lease agreement. However, the general process involves determining the rent reduction or waiver amount and the duration for which the abatement will apply. Here are some common ways to calculate rent abatement:
- Rent-free period: The landlord offers a specified number of months of rent-free occupancy, usually at the beginning of the lease term. In this case, no rent is due for the agreed-upon period. For example, a landlord may provide three months of rent-free occupancy in a three-year lease, allowing the tenant to save on rent for those initial months.
- Percentage-based abatement: The landlord offers a percentage reduction in rent for a specific duration. For example, a 50% rent abatement for the first six months of a lease would require the tenant to pay only half the regular rent for that period.
- Fixed amount reduction: The landlord provides a fixed reduction in rent for a specified period. For example, a $1,000 per month rent reduction for the first year of a lease would reduce the tenant’s rent obligation by that amount each month.
- Rent abatement in exchange for tenant improvements (TI): The landlord offers rent abatement as a credit toward the tenant’s cost of improvements to the leased space. In this case, the rent abatement amount would equal the cost of the improvements up to a negotiated maximum. For example, if a tenant spends $30,000 on improvements and the landlord agrees to provide an equal rent abatement, the tenant would receive a $2,500 monthly rent reduction for 12 months ($30,000 total).
It is essential to understand the exact terms negotiated in the lease agreement to calculate rent abatement, as these can significantly impact the calculation method and the overall rent savings for the tenant. Both parties should carefully review and agree upon the rent abatement provisions before signing the lease to avoid misunderstandings and potential disputes.
Benefits of Rent Abatement for Landlords
At first glance, tenants might seem to receive all the benefits from rent abatement. However, landlords 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 as rent abatement, although it’s related. Rent relief typically breaks down into two categories: rent abatement and rent deferral. While the former involves the complete erasure of a rent obligation for a particular period, the latter doesn’t. Rent deferral involves the delaying of rent expenses until some future period.
Also, note that any form of rent relief may not include the all-or-nothing payment of some monthly sum. Sometimes rent relief includes abolishing or postponing 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 and other property management-related expenses.
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 Legal Information Institute at Cornell University, “Force majeure is a provision in a contract that frees both parties from obligation if an extraordinary event directly prevents one or both parties from performing. A non-performing party may use a force majeure clause as an excuse for non-performance for circumstances beyond the party’s control and not due to any fault or negligence by the non-performing party.” The online legal dictionary goes on to state that “mere impracticality or unanticipated difficulty is not enough to excuse performance … Courts generally do not recognize economic downturn as a force majeure event. … [F]orce majeure events are often labeled as ‘acts of god’ and include both natural and man-made events like fires, floods, storms, war, and labor disputes.”
Does this mean a landlord must provide rent abatement if a tenant invokes a lease’s force majeure clause? Not necessarily. Force majeure clauses usually require rent payments, even during events outside the tenant’s control. Thus, even if a situation qualifies as a force majeure event under a commercial lease, rent payments will likely still need to be made. The specific language of your lease will largely determine whether or not an invocation of force majeure is appropriate.
Other clauses may also come into play when a tenant seeks rent abatement. One such might be a casualty clause, allowing for abatement given some kind of disaster. However, these clauses typically only apply to events that physically damage the premises. In the end, if tenants struggle to make rent payments, nothing stops them from 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 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 how much rent abatement will cover comes when you’re negotiating your lease, not after you’ve signed it.
Do All Commercial Leases Provide a Rent Abatement Clause?
Most of the lease clauses mentioned above appear in commercial leases — but not all. Similarly, precisely what they cover and how they apply to a particular situation can vary dramatically. So, while many commercial leases contain verbiage that may allow for rent abatement, applying general knowledge to specific situations is difficult without particular knowledge of 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. Call us at (312) 329-8400 to see how we might assist you.
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