A rent abatement is an agreement between the landlord and the tenant that provides a period of free rent. During the abatement period, you are not required to pay rent to occupy your space. Often, the abatement period takes place over the first few months of the lease. Some commercial leases also provide rent abatement in the event that offices cannot be occupied due to repairs or maintenance.
Importance of Rent Abatement in Commercial Real Estate Leases
When you negotiate your next commercial real estate lease, it’s always a good idea to see if you can get a rent abatement. After all, the less rent you pay, the more money you save, right? While this is usually the case, sometimes your landlord might expect something in return for your savings.
Understanding the Rent Abatement
Many landlords offer a rent abatement for a simple reason. They want you to become their tenant and pay rent to them. As such, they’re willing to give a little bit of income up at the beginning of the lease to make money over its entire length. This makes sense for you because free rent sweetens the overall deal. In many cases, it also helps defray the cost of moving into the leased space.
Usually, the rent abatement covers the initial period of your lease. Depending on what you negotiate, you could end up paying no rent, or reduced rent for a while. The time frame varies based on your lease, your negotiating style, and the negotiating terms that are in force in your market. It’s common to have your rent reduced while your space is under construction, though. You might also be able to get a little bit more time to cover the opening of your business, too.
Beyond these broad definitions, the only way to find out what kind of rent abatement you can get is to start the process of negotiating. An expert tenant representative can help you get the maximum abatement possible if that is what fits your company’s real estate strategy.
The Landlord’s Perspective
Maxing out your rent abatement might not give you the best deal, though. It usually turns out that free rent isn’t actually free. To understand why this happens, it helps to look at the leasing process from the landlord’s perspective.
The landlord typically wants to extract as much value from you — his tenant — as possible. There are many ways that they can extract value from you. They can charge you a higher rent. Another option is to make you sign a longer-term lease. A different landlord might choose to increase the amount of building expenses that you pay. It’s kind of like how you can go to a restaurant and fill up on a salad, bread, steak or dessert. Either way, you’ll be full.
With this in mind, sometimes a landlord will offer a rent abatement, but when they do it, they are usually thinking of how they will make it up elsewhere in the negotiation. Your abatement might come with higher rent during the rest of the lease. In many markets, it’s common to add the abatement to the end of the lease term. This would make a five-year lease with four free months into a five-year-and-four-month lease so that the landlord still gets five years of income. This might fit your strategy, and it might be a great deal for you, but it’s still important to remember that the owner on the other side of the negotiating table is getting something in return, too.
Things to Remember About Rent Abatement
If you’re unfamiliar with rent abatement for commercial leases, you’re missing out on a lease clause that can greatly lower your occupancy costs. A rent abatement provides a significant benefit for companies, and having the right to one added to your lease is often easier than you might think. Read on to discover what you need to remember about rent abatement.
Rent Abatement Doesn’t Cost the Landlord Anything
From a landlord’s perspective, a rent abatement is the same as having an office space unoccupied. Knowing they now will make money from you signing a lease, giving a rent abatement to you for a few months is usually something landlords aren’t worried about. As a result, landlords are often more open to an abatement than they are to costlier concessions like paying for tenant improvements.
Rent Abatements Appeal to Landlords
It may seem counter-intuitive that landlords like rent abatement. After all, wouldn’t the landlord want the rental income? The truth is that compared to other concessions like tenant improvements, rent abatement is much less costly. From a landlord’s perspective, a rent abatement is the same as having an office space unoccupied. Knowing they now will make money from you signing a lease, giving a rent abatement to you for a few months is usually something landlords aren’t worried about. If no one moves into an office or building, the landlord is already going without rental income. As a result, landlords are often more open to an abatement than they are to costlier concessions like paying for tenant improvements.
You May Still Owe Money During the Abatement Period
Even if you don’t have to pay rent during the abatement period, you may still have to make monthly payments. If your utilities are separate from your lease, you will have to continue to submit payments for them. If you receive a rent abatement, you may still have to make monthly payments to your landlord. Many leases include common area maintenance (CAM) fees that cover the cost of maintaining and making repairs to shared areas in a building. In most cases, tenants are still responsible for making CAM payments during the rent abatement period.
Don’t Lead With an Abatement Request
At the negotiating table, save your abatement request for the right moment. Discuss your most important requests and concessions first and try to reach a favorable agreement. You can request an abatement later on in the negotiations. For example, if the landlord is balking over your requested budget for tenant improvements, you could request a rent abatement for a period of months equal to the budget.
A Rent Abatement Can Be a Bargaining Tool When Used Wisely
Never lead with requesting a rent abatement during a commercial lease negotiation. Save your request for a point where you reach an impasse with the landlord. You may also want to ask for one if you cannot reach an agreement with the landlord regarding tenant improvement allowances.
A Conditional Abatement Often Comes With Caveats
If your commercial lease provides an abatement when you’re unable to occupy your office, make sure to read the clause carefully. The landlord may try to add language that says if the repairs are needed due to the actions of your company, the abatement is void. This could lead to the landlord trying to blame problems on your employees like saying that a pest problem was due to not keeping the office clean. In addition, clauses may state that if the repairs will take longer than a certain period of time, your landlord has the right to cancel your lease rather than provide an abatement. Also, a lot of the time, a landlord will have you repay the rent you would have paid during the abatement period, at the end of the lease and at an escalated amount. Make sure you read your lease well and have a good tenant rep on your side during negotiations.
If You Don’t Fulfill the Lease, You May Need to Repay
With any type of rent abatement agreement, keep an eye out for clawbacks. If your company defaults on your commercial lease, your landlord will typically have the right to a clawback. This means that your landlord can require you to pay back the entire amount of the rent abatement, and in some cases, additional penalties and fees. This could prove costly if you default or exercise the right to sublet, assign or terminate your lease early. As a result, rent abatement may not be a wise choice for start-ups or for companies that are struggling financially and in danger of default.
Rent Abatement Can Take Many Forms
Concession rent abatement typically guarantees a certain number of months of free rent, often at the beginning of the lease. This type of abatement is given to the tenant to sweeten a deal and get them to sign the lease. An initial rent abatement is given to the tenant while improvements are being made on the space. Conditional rent abatement comes into play when a space becomes unfit due to necessary maintenance or repairs.
Fine Print Can Affect Your Ability to Exercise Conditional Abatement Rights
If your lease includes a conditional rent abatement, your landlord may try to make it difficult for you to exercise that right. Specifically, a clause may be added that prevents you from receiving an abatement if the maintenance or repair is needed due to the actions of your company or employees. This can lead to landlords trying to shift the blame onto you in order to avoid the abatement.
Conclusion
When you negotiate your next commercial real estate lease, it’s always a good idea to see if you can get a rent abatement. After all, the less rent you pay, the more money you save, right? While this is usually the case, sometimes your landlord might expect something in return for your savings.
Ultimately, it’s usually a good idea to get a rent abatement. What you end up giving could be less than what you give up to your landlord. That being said, negotiating carefully with a savvy partner is the best way to make sure that you get as much as possible from your abatement.
Originally published on March 12, 2020 by our good friends and colleagues at iOptimizeRealty. The original post can be found HERE.