Rent abatement in a commercial lease means that the tenant does NOT have to pay rent for a certain time period during one of the following scenarios:
- During the initial tenant improvements,
- As a concession in lieu of a reduced rental rate,
- Or when the tenant is not able to occupy the space because major property repairs are needed.
Rent abatement is a negotiable item in a commercial lease that must not be overlooked. To ensure that you negotiate rent abatement effectively it’s important that you consult with a real estate attorney and your commercial real estate agent because once the terms are finalized the clauses will be outlined in the lease contract and set in stone. Whatever happens after that will all be handled according to how the language is set forth in the contract.
Rent Abatement During Initial Tenant Improvements
Sometimes when you lease commercial real estate (e.g. retail space) the space is either in shell condition (brand new) or is 2nd generation space that needs a lot reconfiguration and improvements. Depending on the size of space, existing condition, and if a construction permit is required it could take anywhere from a few weeks to 6-9 months for any improvements to be completed.
It would not make sense to pay rent during the construction period so it’s important that you negotiate to have rental payments not start until substantial completion of all the tenant improvements.
Rent Abatement as a Concession
When negotiating commercial leases you ask for all kinds of concessions such as tenant improvement allowance, lower rate, expansion options, etc. Rent abatement (aka Free Rent) is also something that you can negotiate for. Investors that own buildings can have different investment objectives. Some prefer to cash flow a property and more likely to offer a lower rate. Others maybe trying to sell or refinance the building and more likely to offer free rent instead of a lower rate. You see the rents the landlords collects on a commercial property dictate the market value. The lower the rates the lower the potential value. It’s important to understand the investment objective of each building owner.
Anytime you can negotiate to get rent abatement in addition to a tenant improvement allowance and other concessions you will be better off in the long run.
What happens if you get abated rent and default on the lease?
Getting rent abatement can help you lower your overall monthly rent costs or help you pay for tenant improvements that are above and beyond what the landlord is willing to give an allowance for. However keep in mind in most cases if you default or don’t fulfill the entire lease term you will be required to pay back all or a portion of any free rent given. This is also known as a clawback provision. During negotiations if a landlord is going to demand a clawback in the event you default or break the lease try to negotiate to where you only pay for unamortized free rent. For example if you were given $12,000 in rent abatement and the lease term was 3 years it would be amortized over 36 months ($4,000 per year or $333 per month). If you broke the lease after the 12th month you would have to pay back the rent abatement for the remaining 24 months or $8,000……..which is the unamortized portion.
Rent abatement on the base rent and nnn or just the base rent?
Rent abatement is negotiable. If the landlord agrees to it they would rather just give you free base rent and you pay the operating expenses (taxes, insurance, maintenance). That way they are at least covering their operating costs.
As a tenant you would rather receive free gross rent (not pay base rent or the operating expenses). Do your best to negotiate this. In the end free base rent is better than nothing.
Rent Abatement Due to Commercial Space Being Untenantable
In most commercial leases there is a Casualty clause (like in the example below) that talks about rent abatement in the event the tenant is not able to occupy or access a space because of fire or other casualty. It could be a partial rent abatement or full abatement depending on the scope of damage and what portion of the space the tenant has access to. Potential scenarios could be fire or flooding, natural disasters such as earthquakes, tornadoes, and hurricanes, or condemnation by the city or government. You can also try to negotiate rent abatement in the event of a force majeure such as act of God, shortages of labor, terrorist acts, governmental restrictions, etc.
Rationale Behind Rent Abatement
Commercial property owners typically have business liability insurance on their building. The insurance would cover any damages to the property in addition to the abatement of rent. Personal property of a tenant that is damaged would be covered by the tenant’s own insurance. It’s a good idea for the tenant to have business interruption insurance as well to cover any potential financial losses. Since both parties have insurance – the tenant on personal property and the landlord on the property – the abatement puts the lease contract between landlord and tenant on hold until the property can be occupied again.
How Long Does the Abatement of Rent Continue?
The abatement last from the date of the casualty until the date the landlord has substantially completed the repairs and restoration. Rather than just let tenants out of a commercial lease when a casualty occurs Landlords want the ability to try to cure the defects first within a certain time period (which is negotiated). The restoration could take weeks or months however at some point if the insurance company or contractors determine that the repairs will take longer than the negotiated time frame then the tenant or landlord could terminate the lease.
Tenants Must Negotiate to Not Let Rent Abatement Be Nullified
Tenants need to negotiate to require that no matter who caused the casualty the abatement provision will still exist. For example some landlords have language in the lease that says if the tenant or tenants employee causes the casualty then the abatement clause is nullified and the tenant must continue paying rent while repairs and restoration is being conducted.
Commercial rent is income for a landlord which is paid for by tenants. Part of the rent a tenant pays includes the building insurance coverage. If the abatement clause is nullified then the landlord is able to double dip by getting rent from the tenant and file the claim with their insurance company.
Sample Rent Abatement Clause in Commercial Lease
To see an example of a rent abatement clause in a commercial real estate lease or if you are looking for commercial space for rent in Austin Tx feel free to give us a call at 512-861-0525