Rent Abatement 101: Understanding the Basics for Commercial Properties
January 30, 2023
Are you moving into a new office space and struggling to understand all the complex commercial property systems and requirements?
You're not alone. A lot of new property owners face similar dilemmas and confusion. It's often difficult to understand all the commercial property provisions like lease periods, rentals, rent abatement, etc.
The complexity of the entire situation makes it all the more necessary for you to do your homework before signing your contract.
You can hire a lawyer or an expert tenant representative to help you with all the paperwork, negotiate the rent and ask for concessions in rent.
This concession is called rent abatement. But don't confuse it with free rent. The rent abatement provision is for both commercial and residential properties.
Under the rent abatement provision, a tenant is allowed to suspend all rent payments for a stipulated time or only pay a percentage of the rent.
It’s a great way for tenants to save money on rent during unfortunate accidents, repair work, or unexpected financial crises.
What is Commercial Rent Abatement?
When rent abatement is provided to tenants leasing out commercial properties, it is referred to as commercial rent abatement. The provision is valid only for a limited time, decided by the landlord and the tenant together.
In long-term lease agreements for commercial property, landlords usually provide rent abatement at the very end to offer incentives to the tenant in the hope of lease renewal.
Difference between Rent Abatement and Free Rent
Rent abatement means to reduce the rent or no rent only for a limited period. For commercial property, rent abatement is usually provided for 3 to 5 months.
On the other hand, free rent means living in a rented unit without paying any rent at all for a fixed time or during the entire duration of their tenancy.
In the commercial property market, free rent schemes are often provided by the government.
Types of Rent Abatement
Here are the types of rent abatement that your landlord can offer you:
The landlord will reduce your rent for a decided period. Once the abatement period ends, you will have to start paying the rent in full.
Sometimes landlords agree to waive the security deposit or use it as one month’s rent under the rent abatement period. Corporate offices use this method during a financial crunch. However, they are expected to pay the security deposit once they have regained their financial stability.
Some landlords also offer rent abatement by extending the lease duration. This allows the landlord to receive all the payments they would have originally received.
Why Do Landlords Agree to Rent Abatement?
Here are some reasons why landlords agree to rent abatement:
Usually, landlords use rent abatement as an incentive to attract new tenants and fill their vacant properties as soon as possible. The commercial property market is very competitive, and landlords prefer reduced rent rather than no rent at all.
Rent abatement is also used as a strategy by landlords to attract long-term leases and lease renewals. Long lease agreements save them from the hassle of drafting a new lease order along with other legal procedures each time a new tenant moves in.
Sometimes landlords also agree to rent abatement under good faith and to build a trustworthy and cordial relationship with the tenant.
Landlords use rent abatement as a negotiation tool when wanting to lease out their commercial space. Rent abatement offers can make the deal look highly attractive and affordable to the tenant.
Circumstances Under Which Rent Abatement is Provided
Rent abatement provisions are usually mentioned in terms of commercial property leases. It is advisable to read the terms carefully and clear any doubts.
The abatement rules will define the circumstances under which the landlord will agree to reduce your rent or suspend rental payments.
The circumstances under which rent abatement provisions can be availed are as follows:
When moving into a brand-new commercial property or a second-generation property, the tenant might want to get some custom designing and appropriate work done, during which the tenant is eligible for rent abatement.
If there is any repair and maintenance work to be done, the tenant can ask for rent abatement, which can range from anywhere between 2-4 months.
The rental property undergoes some damage due to natural disasters like floods, earthquakes, hurricanes, hailstorms, etc. The situation of property damage through fire also makes the tenant eligible for rent abatement.
Under sudden and unexpected governmental evacuation orders, the tenant can be allowed rent relaxation.
Rent abatement protects the tenant from rent payment during unfortunate incidents like rioting damage, terrorist attacks, theft, vandalism, etc.
Uninhabitable conditions like mold infestation permit the tenant to ask the landlord for rent abatement until the problem is fixed.
Lastly, the tenant can simply ask for rent abatement under situations like cash crunch or other unforeseeable financial setbacks. However, under such conditions, the landlord is under no obligation to accept your rent abatement.
Landlords also have to be smart while deciding rent abatement terms. If they're letting go of their monthly rent, they must have plans to extract value from the tenant through other venues and strategies.
This is the main reason why landlords prefer offering rent abatement in long-term lease agreements. This way, they save themselves from the hassle of finding a new tenant and renewing a lease in a short period of time.
Often, landlords offer rent abatement to save themselves from negotiation when a new lease contract is being signed. Tenants try their best to get the rent reduced as much as possible.
As a solution, landlords suggest rent abatement offers as it benefits both parties in the long run. The landlords themselves save themselves from finding new tenants or having vacant property for too long, whereas the tenant benefits from reduced price or no rent for a few months.
Things to Remember About Rent Abatement
Here are some things you must keep in mind while considering rent abatement:
Ensure you have a clear discussion with your landlord regarding rent abatement terms and that both of you are on the same page.
Have discussions regarding rent abatement before signing the deal.
Ensure all the terms and conditions of the rent abatement are properly mentioned in the lease agreement.
Double-check the start and end of the abatement.
You will still be responsible for paying the other business liabilities, like electricity bills, insurance, etc., during the abatement.
Be extra careful of when you put forward a rent abatement request to your landlord. Wait for the right moment and then begin the negotiations.
Be mindful of the lease period. Your landlord can ask you to repay the abatement in case you do not fulfill the lease period or other requirements. Consequently, it's not advisable for new businesses and start-ups to rely on rent abatement for cost savings.
You are eligible to hire a tenant rep on the landlord’s budget if you are finding it difficult to manage the property leasing processes and rent abatement negotiations.
Study the market and property rates in the neighboring areas before striking a deal or negotiating. This will allow you to get the best deal.
Rent abatement can be a great way to save money on rent, especially for commercial properties. However, remember to read the lease agreement and rent abatement terms carefully before signing the contract and moving into the new space.
If you are not satisfied with some rent abatement conditions, do not hesitate to discuss them with your landlord. This will ensure clarity and foster healthy communication between you and your landlord.
Need help with lease management involving complex aspects like rent abatement provisions? Talk to us and know how you can manage all your commercial property leasing processes from end to end with lease management software, LeasO.
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