Draft Airtight Rent Abatement Provisions
Rent abatement is frequently mentioned when discussing commercial leases. But it’s not as simple as including a clause that spells out the circumstances under which tenants are entitled to withhold rent. There are many variables and, if you don’t draft rent abatement provisions carefully, you could overlook specific items that can affect you later if the tenant exercises its right.
Rent is what keeps your office building or shopping center running, and losing rental income from a tenant can affect you in many negative ways. So familiarize yourself with all aspects of rent abatement before agreeing to this remedy in a lease with a tenant. Here are four key items that you need to know about in order to be fair to tenants who legitimately should receive some compensation when things don’t go as planned with their tenancy, but also protect your bottom line.
Key Item #1: Dealing with Casualty Damages
Tenants typically get the right to rent abatement when their space becomes unusable after a casualty like a fire or flood. But if you don’t draft this provision very narrowly, you could open yourself up to your own disaster: a tenant that refuses to resume paying rent.
This can happen when you fail to adequately define when the abatement period will end. Don’t simply say that the abatement period will continue until the space is no longer “unusable.” That’s a vague term that could give the tenant the opportunity to take advantage of you. It’s important to limit the tenant’s abatement right by setting definitive restrictions on when the abatement will end in the lease clause. Set two objective circumstances upon which the abatement period will end. Say that the abatement will last from the date of the casualty until the earlier of the following two dates:
Possession of unusable part. This is the date the tenant, or its subtenant or any other occupant in the space, takes possession of any part of the unusable space for any purpose. Don’t let the tenant argue that the abatement should end only if it’s using the space for its previous purpose—this could lead to a dispute about whether or not the tenant is using the space the way it was previously used.
Substantial completion of restoration work. This is the date that the work necessary to restore the unusable part of the space to a usable condition is “substantially complete,” meaning the space or a portion of it can be used the way it was before the casualty. In other words, no additional major work must be done. This is also known as the “substantial completion date” in some leases.
However, you should be careful when agreeing to allow the tenant to temporarily use the space without losing its abatement right after an emergency. Remember to spell out in the lease what situations constitute an “emergency.”
Key Item #2: Reducing Abatement Proportionately
If, under its lease with you, a tenant is entitled to rent abatement while you complete renovations, construction, or other work that disrupts its business, make sure that you carve out the right to reduce the abatement in proportion to the space that’s restored or usable.
For example, if a tenant’s store or office space has several floors or rooms and you complete work on a floor or a room so that it’s usable again, the tenant shouldn’t have the benefit of withholding rent until the entire space is restored. Instead, you should be able to reduce abatement as work on part of the unusable space becomes substantially complete. In other words, reserve the right to reduce abatement in proportion to the amount of the space fixed. If only a portion of the space has been restored or reoccupied by the tenant, the tenant must now pay the rent on that portion of the space.
Make sure you have the “sole and absolute discretion” to decide whether the restoration work is substantially complete in all or part of the unusable space and whether the tenant has “taken possession” of the space.
Key Item #3: Excluding Additional TIA from Abatement
One common request from tenants is an additional tenant improvement allowance (TIA). For example, you offer to give the tenant a $25-per-square-foot TIA, but the tenant asks for $45 per square foot. If this is a sticking point for the tenant and you agree, you might give the additional TIA amount—here, $20—as a loan to be repaid by the tenant in its rent over the lease term.
But if, for some reason, the tenant exercises its right to abate rent, is it entitled to treat the additional TIA amount as rent to be withheld—even though it’s actually a loan from you? Don’t be deprived of recouping the money you loaned to the tenant. Make sure that you’re repaid the additional TIA on time. You can do this by making it clear in the lease that if the tenant’s rent abates for any reason, abatement will not apply to the additional TIA. Treat the additional TIA as a loan that must be repaid, no matter what happens. Keep in mind that the initial amount of the TIA shouldn’t be treated as a separate loan; rent abatement would apply to that portion.
Ask your attorney about adding this abatement language to your lease:
Model Lease Language
Wherever this Lease provides for the abatement of rent payable by Tenant to Landlord, including, without limitation, Clauses [insert #s of relevant clauses, e.g., casualty and condemnation clauses], the following limitation shall apply with respect to abatement of rent for the Premises initially demised hereunder: Only the rent payable by Tenant in excess of the monthly amount $[insert amount of monthly rent allocated to repaying additional TIA] shall be abated.
And consider adding a lease termination clause so that if the lease is terminated by the tenant before the expiration date for any reason, the tenant is required to immediately repay you the remainder of the additional TIA that it hasn’t already repaid through its rent. When doing this, use a short period of time—for example, 30 days after the termination date—and specify that it must be an amount equal to the “present value” of the additional TIA multiplied by the number of months remaining in the initial lease term.
Model Lease Language
In the event this Lease is terminated for any reason, Tenant shall, within [insert #, e.g., thirty (30)] days after such termination date pay Landlord the then present value of the product of $[insert original additional TIA amount] multiplied by the number of months remaining until the Expiration Date. The “present value” shall be computed by using the interest rate set out in Clause [insert #] hereof.
A savvy tenant might demand that you reduce its termination payment to the extent that you’ve received insurance or condemnation award proceeds covering the tenant’s improvements built with the additional TIA. Otherwise, you would get a windfall of payments by both the tenant and the insurer for the same improvements.
Key Item #4: Prohibiting Withholding Rent as Reflex to Default
Don’t allow a tenant the right to respond to a lease default on your part by automatically withholding its rent. A tenant that’s looking for a way to stop paying rent for one reason or another could find a loophole in the lease by asserting that you’re in default—giving it an abatement right—because you’ve done or forgotten to do something minor that you’re obligated to under your lease. While many tenants will overlook minor infractions, a tenant can take advantage of a rent abatement right that kicks in when you default.
Draft your lease using independent covenants—that is, require tenants to pay their rent even if you somehow shirk your lease obligations. In its lease, the tenant should “acknowledge and agree” that all of its covenants and obligations under the lease are “independent” of yours and that it won’t be off the hook for rent payments in the event that you breach the lease. That way, the tenant is still obligated to hold up its end of the bargain, continuing to pay rent, even if you default on the lease. Without an independent covenant, if you shirk your obligations, the tenant has the right to respond by withholding its rent, which could have big consequences for your cash flow over a small oversight at your center or office building.