Should You Use “Abatement” in Lease?

Q: I’m contemplating signing a lease with a tenant that will require the tenant to construct its own building at my shopping center and require me to pay a construction allowance within a certain period of time after the tenant opens for business. The tenant is negotiating for provisions allowing it, in the event that I don’t pay it the construction allowance, to abate rent and other charges until it has been paid. I’m wary of allowing the tenant to simply withhold rent, unless I can deduct the withheld amount from the late construction allowance amount when it’s paid. Will using the term “abate” suffice in this situation?

A: If you allow your tenant to abate rent for as long as you don’t pay the construction allowance, the tenant will end up with a windfall. That’s because it will be operating in its space essentially for free for some period of time. That’s why the specific language you choose to use in your lease with the tenant is so important—the term “abate” has a specific meaning and consequence.

So, say what you really mean in your leases with tenants. And, keep in mind that, especially if you and the tenant are sophisticated parties, a court is likely to enforce the lease as it’s written even if you argue later that abatement isn’t fair to you. This happened in a recent bankruptcy case that ended up on appeal in a New York district court.

Dispute Arises Over Payment of Allowance

In that case, an owner and tenant agreed to a 20-year lease at a shopping center. Under the terms of the lease, the tenant promised to construct a new facility for itself in the shopping center, and the owner agreed to pay the tenant a construction allowance for the completion of the work within 90 days following the date that the tenant opened its store to the public. The lease provided that if the owner fails to pay the allowance, then the tenant’s obligation to pay fixed annual rent and certain other charges will “abate” until the allowance is paid.

After the owner didn’t pay the allowance when it was required to, the tenant withheld rent and charges. When the owner was ready to pay the allowance, it told the tenant that it would credit the total amount of rent and charges that had been withheld by the tenant against the construction allowance, essentially not paying the entire agreed-upon amount of the allowance.

The tenant asserted that the word “abate” in the lease precluded the owner from arranging a set-off of rent and charges against the allowance. A bankruptcy court interpreted the lease as providing a “customary abatement, not a set-off right.” The owner appealed.

District Court Enforces Chosen Term

A New York district court reviewed the lease and wasn’t persuaded that the parties intended for rent and charges to be set off against the allowance. The district court noted that the lease unambiguously states that if the owner fails to pay the allowance, then the tenant’s “obligation to pay fixed annual rent and charges shall abate.” It stressed that the term “abatement” is defined as “the act of eliminating or nullifying.”

The tenant’s obligation to pay rent and charges was eliminated during the period that the owner failed to pay the allowance, the district court concluded. Thus, the bankruptcy court correctly held that, under the plain meaning of the lease, the lease does not provide for rent and charges to be set off against the allowance.

In its decision, the district court pointed out that the owner and tenant are “sophisticated parties,” and presumably they knew how to draft a lease. That they chose not to provide specifically for set-off persuaded the court to reject the owner’s suggestion that the allowance it owed the tenant should be reduced.

While the owner asserted that the tenant would receive a windfall, having been open and operating in the space essentially for free during the period of the breach, the court stressed that, though it recognized that the tenant would emerge from the dispute with a significant profit, the lease contemplated such an outcome, and the court’s task wasn’t to rewrite a contract for the parties better than or different from the one they wrote for themselves [Providence, LLC v. The Great Atlantic & Pacific Tea Co., Inc., April 2014].

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