Don’t Fall into Rent Abatement Trap

Rent abatement is frequently mentioned when discussing commercial leases. But it’s not as simple as including a clause that spells out the circumstances under which tenants are entitled to withhold rent. There are many variables and, if you don’t draft rent abatement provisions carefully, you could overlook specific items that can affect you later if the tenant exercises its right.

For example, tenants typically get the right to rent abatement when their space becomes unusable after a casualty like a fire or flood. But if you don’t draft this provision very narrowly, you could open yourself up to your own disaster: a tenant that refuses to resume paying rent.

This can happen when you fail to adequately define when the abatement period will end. Don’t simply say that the abatement period will continue until the space is no longer “unusable.” That’s a vague term that could give the tenant the opportunity to take advantage of you. It’s important to limit the tenant’s abatement right by setting definitive restrictions on when the abatement will end in the lease clause.

Set two objective circumstances upon which the abatement period will end. Say that the abatement will last from the date of the casualty until the earlier of the following two dates: (1) when the tenant takes possession of the unusable part for any purpose; and (2) when there has been substantial completion of the restoration work—meaning the space or a portion of it can be used the way it was before the casualty and no additional major work must be done, also known as the “substantial completion date” in some leases.

For three more key items that you need to know about in order to be fair to tenants who legitimately should receive some compensation when things don’t go as planned with their tenancy, but that also protect your bottom line, see “Draft Airtight Rent Abatement Provisions,” available to subscribers here.