Rent Abatement: All You Need To Know

Rent Abatement: All You Need To Know
Rent Abatement: All You Need To Know

Rent abatement is an agreement between a landlord and a tenant that provides for a period of free rent.  During the discount period, you do not have to pay rent to occupy your space. 

Often the decline period takes place during the first few months of the lease.  Some commercial leases also provide for reduced rent in the event that the offices cannot be occupied due to renovations or maintenance.

What Is Rent Abatement?

Rent abatement is a rental incentive that can be included in the lease of both residential and commercial properties.  This helps to reduce the rent that must be paid during the lease period. 

For example, if a tenant negotiated a 5% reduction in their official rental price of $80,000, that means the tenant would pay $4,000 less in rent each month for the duration of the lease.

However, it is possible to negotiate a rent reduction to provide for a rent-free/rent-free period instead.  Typically, this rent-free period is at the beginning of a one- to three-month lease.  Larger premises with higher rents tend to attract a longer rent-free period, such as six months to a year.

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How Does It Work?

Many landlords offer a rent discount for a simple reason.  They want you to become their tenant and pay them rent.  So they are willing to give up some income at the beginning of the lease to earn money throughout the lease. 

This makes sense for you as the free rental sweetens the overall deal.  In many cases, it also helps cover the costs of moving into a rented space.

Usually, the rent discount covers the initial period of your tenancy.  Depending on what you have agreed, you may be able to pay no rent or have your rent reduced for a period of time. 

However, when your property is under construction, the rent is often reduced.  You can also get a little more time to cover the opening of your business.

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Commercial Lease Rent Abatement

Commercial real estate lease terms can be a daunting task both to understand and to negotiate.  One part of a commercial lease, the rent rebate clause, can be particularly tricky. 

If the clause is not carefully drafted, it can cause problems for both the tenant and the landlord, which is the opposite effect that the reduction should have.

The discount clause has a two-fold argument.  First, commercial property is usually covered by landlord’s liability insurance.  Any damage to the property will be covered by the insurance after the landlord has paid the deductible. 

Second, belongings are usually covered by renter’s or lessee’s liability insurance, or both, and in addition, many companies carry business interruption insurance.

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What Are The Forms Of Rent Abatement?

Rent abasement is not an option to waive rent.  You can usually think of a rent abatement as deferring the rent you owe.

As a tenant, you want to compensate the landlord for missed payments if you can.  Rent reduction often involves extending the lease, agreeing to renew at a higher rent, or setting up a repayment plan for the future.

Extension Of Lease

Many tenants and landlords agree to discounts by extending the lease long enough to offset the payments the landlord would have received.  Several months can be added to the end of the lease, pushing the reduced rent payments to those months.

  Let’s say you can’t make the rent for three months.  In this case, the 36-month lease becomes a 38-month lease because the extra months are added to make up for the three months of reduced rent.

Repayment Plan 

If the tenant and landlord do not wish to renew the lease, mitigation can also be achieved by creating a repayment plan. 

The reduced rent will be divided and added in equal amounts to the tenant’s monthly rent for the remainder of the term.  Essentially, it reimburses the landlord for the missed rent.

Rent Reduction

Tenants can enter into an agreement whereby they only pay part of the monthly rent for a certain period.  At the end of this period, similar to the repayment plan, they will pay the remaining rent owed (the portion that was reduced) for the remainder of the term.

Security Deposit

The landlord may agree to use the tenant’s security deposit in exchange for a month’s rent.  When financially possible, the landlord expects the tenant to re-deposit.

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What Happens If The Tenant Decides To Terminate Their Lease On Rent Abatement?

  This is understandably worrisome, as the biggest beneficiary of a rent reduction is the long-term tenant.  However, people change their minds all the time. 

Let’s say in the example mentioned above, a new modern building opens that offers better Sunny views in the same location at a lower price.  Sunny will probably want to take the new premises as his office.  Mike’s lease remains terminated.

This is why refund clauses are important for landlords who offer a rent discount.  A refund clause entitles landlords to a refund of the incentive clause if the agreement is terminated. 

However, they should be drafted with care (it’s good business practice to have a chat with a lawyer about how you would enter an indemnification clause!).

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Difference Rent Abatement and Free Rent

Rent abatement means a provision in residential or commercial leases that allows tenants to pay a portion of the rent or suspend rent for a specified period. 

On the other hand, rent-free refers to an offer by landlords, institutions and even the government to live in a property without paying rent.  Given the many provisions in leases, tenants should read and seek advice on matters they do not understand.

Landlords will also use free rent to increase the price per square meter.  Often, the total rent remains the same, but the “free” rent is simply spread over the length of the lease.  However, it can be beneficial for renters. 

The curtailment period gives you much-needed time to renovate the new premises, which can be important for businesses such as bars and restaurants that require specialist equipment.

The amount of free rent you can negotiate will depend in part on the length of the lease.  You’ll usually need to rent for at least three years, after which you can get a month or two of free rent.  In a long-term 10-year lease, you can negotiate six months.

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What Is The Difference Between Rent Abatement And A Deferral?

A rent abatement is the temporary cessation or reduction of rental payments.  This most often happens when the property has become unusable due to fire or natural disaster.  It is also a full remission of a portion of the total rental cost.

A deferral, on the other hand, is a temporary reduction in rent that must be repaid at a later date.  The result is that the overall lowest cost remains the same.  It is not as attractive to tenants as a discount.  On the other hand, if you are a renter, it may be easier to negotiate deferment terms than a discount.

How Long Is The Rent Abatement Valid For?

In short, it depends on how long it will take to make the property usable again.  If it takes two weeks, the drop will last two weeks.  If a rental house is destroyed by a tornado and needs to be completely rebuilt, it can take several months.

In some cases, a reduction may mean a reduction in benefits rather than a termination.  This occurs when a property is largely, but not entirely, unusable.  For example, the lower half of a two-level house may be damaged by a flood, but the upper half will remain intact. 

In such a case, since half of the house is unusable, the rent may be halved.  Alternatively, some landlords reduce the rent by reducing the fair market value of the property.

What Is The Eligibility Requirement For Rent Abatement?

The best way to qualify for a rent discount is to include it in the terms of your contract.  Your chances of getting a good deal will largely depend on how long the property has been vacant. 

The longer the landlord has been without a tenant, the more likely he is to get the desired terms.  If the property becomes unusable, you will be able to claim compensation until the damage is repaired.

However, you can also request a rent reduction if your lease does not provide for this.  If the landlord does not comply with the terms of the lease, including providing housing, you can sue them and get a judge’s order to reduce the value. 

However, you will first need to formally notify the landlord that repairs are needed, give them a certain amount of time to carry out the repairs, and only then file a lawsuit.

Conclusion

Rent abatement means that the tenant will still pay regular rent.  As already mentioned, there are several types of rent abatements: in cases where rent is not paid for a certain period of time, the tenant resumes or starts paying rent on a set date.

The discount does not release the tenant from paying the full rent.  This reduces the total amount of rent payable, either by reducing it to a monthly total, or by setting a period in the contract when no rent is due.

Rent Abatement FAQs

What Does Rent Abatement Cover?

The rent reduction covers the cost of the loss of use of the property – in other words, the cost of the rent.  It does not cover damage to your personal property.  For example, if your apartment burns down, you will be entitled to a rent discount.  But to replace your furniture, electronics, and other personal items, you’ll have to file a renter’s insurance claim and pay a deductible.

Does Rent Abatement Require You To File A Lawsuit?

Rent abatement usually requires filing a lawsuit.  Depending on the amount you’re asking for a reduction, you’ll file a lawsuit in small claims court or superior court.  You can also request a retroactive rent abatement — a refund of the rent you’ve already paid for a substandard rental.  In some jurisdictions with special rent abatement orders, tenants must follow the protocol before taking the case to court.

Will The Tenant Still Pay Rent During A Rent Abatement Period?

The tenant may still be responsible for rent during the partial rent abatement period, but the amount is reduced.  In the case of a full rent reduction, the tenant has the right to start a business rent free. 

For example, if a tenant has a rent discount agreement for the first six months of the lease, they will only be responsible for paying rent for the remaining six months of the one-year lease. At the end of the rent grace period, the tenant will have to start paying rent in the full amount specified in the lease.

References

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