Don't Let Today's Rent Breaks Limit Tomorrow's Rent Increases
Granting rent concessions and abatements (which we’ll refer to collectively as “abatements”) has become standard operating procedure in these troubled times. But before you engage in the practice, check your lease for a loophole that can limit how much of a rent increase you can command later.
The Question: Does your lease provide for future rent increases based on the Consumer Price Index (CPI)? If so, you could end up getting burned.
Here’s the loophole and how to plug it.
Loophole: Tenant May Claim Increase Is Based on Rent Actually Paid
Here’s what can happen. You give your tenant a rent abatement of three months in year one of the lease. The lease has a clause that provides for annual rent escalations based on the year-over-year change in the CPI. When it’s time to apply the rent increase, you multiply the previous year’s rent by the CPI percentage increase. The problem is that the clause may not say anything about how to factor the three-month abatement into the calculation.
So, you freelance it by multiplying the percentage increase by the full amount of rent payable during the first year of the lease as if there were no abatement. Not so fast, says the tenant. You should calculate the adjustment by multiplying the CPI percentage increase by the amount of rent actually paid during the year, it claims. In other words, the tenant wants you to subtract the three months of abated rent before applying the CPI multiplier. The result, of course, is a smaller rent increase.
Example: The tenant’s rent in year one of the lease is $10,000 per month. The CPI was 100 at the lease commencement date and increased to 105 on the first anniversary of the commencement date, an increase of 5 percent. To calculate the annual rent hike, you multiply $120,000 (12 months of rent at $10,000), by 5 percent. Result: An annual increase of $6,000, or $500 per month.
But under the tenant’s formula, you base the rent increase on 5 percent of $90,000, rather than $120,000, since that was how much rent was actually paid. Result: An annual rent increase of $4,500, or $375 per month. That’s a big difference.
Solution: Say Rent Abatement Doesn’t Count Toward Increase
As long as you’re aware of the loophole, you can plug it rather easily and head off disputes over future rent increases. All you have to do is ensure that the CPI clause in the lease specifies that the rent used in the rent increase calculation is exclusive of rent abatements.
Model Lease Language
In making such [CPI-based rent increase] calculations, no effect shall be given to any existing rent abatements or concessions.