You may think entering into a commercial lease without paying some or all of the rent for a period seems too good to be true, but you may be surprised to find that it is not uncommon in the world of commercial leasing. Often used by landlords to attract tenants into high value leases, rent abatement can act as an incentive as well as provide much needed financial relief for many businesses.
In this guide, our experienced commercial property solicitors walk you through the mechanics of rent abatement, to help both landlords and tenants understand whether this is something they want to offer or explore.
Contents:
- What is rent abatement in a commercial lease?
- Is rent abatement the same as free rent?
- When can a tenant request rent abatement under a commercial lease?
- Is rent abatement mandatory or at the discretion of the landlord?
- How does rent abatement work?
- How is rent abatement calculated?
- How long does rent abatement typically last?
- Can a rent abatement agreement be terminated or renegotiated?
- Alternatives to rent abatement
- Summary
What is rent abatement in a commercial lease?
Rent abatement is when a landlord and tenant agree that rent is not payable or payable at a reduced rate for certain periods. In practice, it can come in different forms:
Percentage discount: In some cases, rent abatement is applied as a percentage discount across all or part of the term of the lease. This is more often the case with high value, lengthy commercial leases, with the idea being that the tenant is offered a decrease in rent for signing up for a longer period. It acts as an incentive to tenants to take on the lease while giving the landlord the security of a long-term tenant.
Disaster or casualty: For other leases, the rent abatement clause may only come into play in certain circumstances where it would be appropriate to suspend or reduce the rent to alleviate the financial burden on the tenant, for example, if the property or access to it is damaged or impacted beyond use. The pandemic is a good example of where rent abatement could be (and indeed was) put to use - allowing for a reduction or suspension in rent whereby as a result of government regulation retail shop tenants were unable to use or access their property for their business to prevent or delay the spread of covid-19.
Life line: If a business is struggling to make a profit and meet its rent obligations – in these instances the landlord could agree to reduce the rent for a certain period to allow a tenant to get back on their feet. For the landlord, this may be preferable to receiving late payments, chasing debt or worst case scenario being left with an empty property should their tenant become insolvent.
The amount of rent abated, the period for which it will apply and the circumstances in which the clause kicks in will vary on a lease-by-lease basis.
Is rent abatement the same as free rent?
Rent abatement can be easily confused with rent free periods in commercial leases but they are not the same. Rent abatements tend to offer a discount across part or all of the lease term, or kick in to suspend rent temporarily if certain events happen. Rent free periods on the other hand are typically only granted by landlords at the start of a tenancy where no rent is payable at all for a set period (usually one to six months). Essentially the tenant is exempt from paying rent during rent-free periods, which is not the case with rent abatements. Instead, rent is reduced throughout the lease or there is a temporary period during the contract where it is not owed so whilst the effect is that it may lessen the overall amount of rent that is paid to the landlord - it is not akin to no strings attached zero rent.
When can a tenant request rent abatement under a commercial lease?
This will very much depend on the terms of the lease and what was agreed between the parties at the outset. The lease may set out circumstances in which the tenant can invoke that the rent is reduced or temporarily suspended, but these are likely to be heavily qualified by landlords. Even if a lease does not formally set out instances appropriate for rent abatement, a tenant can always approach and make a request from the landlord of your own volition. The landlord may be under no obligation to agree to anything if it is not a term of the lease, but some landlords may be willing to take a commercial view if the alternative is a commercial dispute or losing a tenant in a difficult market.
Is rent abatement mandatory or at the discretion of the landlord?
This will depend on the exact wording of the lease. If there are no mandatory provisions that enable a tenant to invoke or in which rent abatement automatically applies, then it is ultimately at the discretion of the landlord. It may be in the best interests of landlords to agree to a rent abatement and take a temporary hit in the short term to avoid longer lasting detrimental effects on their property income.
How does rent abatement work?
The primary goal behind rent abatements is to provide some sort of money saving advantage or relief to tenants, whether that is as a result of discounted rent across the whole or part of the lease or a suspension of rent for a temporary period. With the latter, the idea is that the tenant resumes paying rent at the original amount as stated in the lease at some point. Depending on which form the rent abatement takes (it could even be both), the lease will be structured accordingly. This requires careful and professional drafting to ensure that both parties are very clear on what circumstances trigger rent abatement, what percentage discount is applied in those instances (it can be 100%) and for how long the arrangement will last.
How is rent abatement calculated?
This will involve using the rent reduction amount (can be 100%) over the duration for which it is to apply. If for example, the landlord offers the tenant 50% rent abatement on the first three months of annual rent due for a lease of £12,000 per annum, this would mean the tenant pays £500 instead of the usual £1,000 for the first three months (£1,500 overall saving).
With ‘disaster’ or ‘casualty’ clause rent abatements that kick in during the lease, the parties will of course need to agree on what percentage applies once triggered. Even then, there is a lot to consider here that may not be apparent on the face of it for example,
- If rent is reduced for a certain period, does the landlord expect to recover the balance at some point in the future?
- If the balance is due, will interest be applied to it?
- If so, how much interest and when will that become payable?
- Can the tenant pay the balance off in installments, and if so, what is the frequency?
If the lease is a turnover lease, where rent is linked to the amount of turnover the tenant generates rather than a set figure, then parties will need to take this into account when deciding how to reduce rent.
How long does rent abatement typically last?
This can be anywhere from weeks to months and even years if the landlord is able to insure against rent abatement, but for obvious reasons, it cannot go on indefinitely and most leases will be careful to provide a long-stop date. Let’s take the example of a property that becomes unusable as a result of fire damage, while a rent abatement would be useful this cannot go on indefinitely – the tenant will be keen to open the shop and start trading again and any loss of rent insurance available to the landlord will likely itself be time limited.
To avoid any misunderstandings and disputes later down the line both parties must be clear on how long the arrangement lasts. This will ultimately depend on the landlord-tenant business relationship and unique circumstances. In some cases, parties may agree that rent abatement periods are terminable on notice (ie one party giving notice to the other that the arrangement is to end and the standard rent is to apply). If this is the case, the clause must specify how much notice is required and in what form it is to be given. Parties could even agree that the rent abatement period or arrangement automatically comes to an end under certain circumstances or the occurrence of a specific event. For example, if the parties have agreed to temporarily reduce rent while a tenant’s business is struggling to make profit, it could be agreed that rent becomes payable or due again as soon as the tenant records a profit.
Can a rent abatement agreement be terminated or renegotiated?
If rent abatement is a mandatory provision in the lease, then the landlord would technically be in breach if he attempted to unilaterally terminate the arrangement. Any renegotiations to rent abatements specified by a lease would need to be agreed mutually between both parties.
Landlords in particular will want to be very careful here to ensure that any conduct or agreement reached in this regard does not amount to a waiver of their right to be paid rent. Similarly, landlords will be well-advised to ensure any document is professionally drawn up, the arrangement is temporary in nature and cannot be deemed to amount to a permanent variation of the lease such that the tenant can argue estoppel at a later date – for example the landlord cannot revert to claiming full rent once the temporary nature of arrangement as ended.
Alternatives to rent abatement
- Rent-free periods: This is a tool often used by landlords at the start of a lease and acts as an incentive to attract tenants to sign up. The idea is that the rent-free initial period allows tenants to set up shop and get things in order before they start trading and become liable for rent. The rent is free or essentially waived for that initial period. Rent-free periods often come in handy for landlords in difficult markets where they may struggle to let their property without some concession. They also work for high-value leases where the tenant may not be able to meet the large rent payments initially before they get their house in order and start to trade.
- Fit out contributions: This is where a landlord agrees to cover the costs of fitting out the property to suit the tenant’s need, installing fixtures, fittings, signs and equipment to make it ready for use by the tenant. Sometimes the landlord will agree to carry out the fittings themselves so that the tenant is ready to start trading as soon as they occupy the premises. This involves the landlord agreeing to reimburse the tenant’s costs of fit out. It is rare that the landlord will agree to cover all the costs, and in practice usually works out as a percentage ‘contribution’ to or ‘discount’ of the fit out costs, with the tenant making the initial outlay then claiming its costs as a reimbursement from the landlord.
- Short term leases: If rent free periods or fit out deals are not on offer, tenants with young or unestablished business models may opt for a shorter term lease altogether. Rather than committing to a long term lease while the business trajectory is uncertain, a short-term lease may give you the time you need to see whether this will work out in the long run or not without the financial commitment. Another way this could be structured is by negotiating a break clause in a longer term lease which you can exercise if things don’t go according to plan. If you are relying on a break clause, you must exercise the clause carefully so as not to lose the right to break and end up in a long term commitment you cannot afford.
Summary
Rent abatements can be a useful tool for both landlords and tenants in commercial leases. Whether they are applied as a percentage discount to some or all of the annual rent due, or when disaster strikes, rent abatements can save money when it is most needed for tenants and also give the landlord some peace of mind/security for longer term leases. If you are considering a rent abatement in a commercial lease, you must talk to a solicitor to ensure the mechanics are carefully drafted and clearly understood by all parties.
