Key Concessions to Help Attract Tenants During Downturn

On Oct. 3, 2008, President Bush signed the Emergency Economic Stabilization Act of 2008 into law. This so-called bailout package is considered a necessary evil to move our economy in the right direction, but experts warn that it's far from a quick fix and expect the turnaround to be a slow and painful process. As a result, you'll probably see a significant rise in vacancy rates and more hesitation on the part of prospective tenants that had previously been looking to sign new leases.

To stay competitive and maintain full occupancy in your buildings, you may have to offer concessions to attract prospective tenants'and to retain those up for lease renewal, says Minnesota attorney Barry W. McKee Jr. But at the same time, you must protect yourself. The following three concessions can help you attract strong tenants while protecting you against undesirable tenants that may default. Before using any of the lease clauses mentioned, be sure to review them thoroughly with your attorney.

Concession #1: Offer Rent Abatement

In tough times, owners sometimes resort to adding rent abatement clauses to their leases. Rent abatements serve as negotiating tools and help get tenants locked into leases. The downside is that the owner has to give the tenant free rent for a set amount of time.

A properly drafted lease clause will protect against a tenant that might take advantage of the free-rent months and then default. To avoid being burned, use the following lease language:

Model Lease Language

1. Abatement Months. No Base Rent or Additional Rent shall be due for the following months (the “Abatement Months”) collectively: [insert months and years] (the “Rent Abatement”).

2. Conditional Rent Abatement. The Rent Abatement is conditioned upon Tenant's not having committed a monetary Event of Default in excess of $[insert amt., e.g., one month's rent] under this Lease.

3. Event of Default. If Tenant commits an Event of Default in excess of $[insert amt., e.g., one month's rent] and fails to cure such Event of Default in a timely manner, then:

i. The entire Base Rent and Additional Rent otherwise due and payable for each of said Abatement Months shall be amortized equally over the Lease Term and the unamortized portion shall be reinstated and shall become due and payable; and 

ii. All of the Rent Abatement that has not been used by Tenant as of the date of the occurrence of such Event of Default shall thereby automatically terminate and become null and void, and Tenant shall thereafter pay all Base Rent and Additional Rent when due under this Lease, without regard to the rental abatement provisions of this Lease, unless Tenant cures the Event of Default either before the first day of the next scheduled Abatement Month indicated in Paragraph a hereof, or within [insert #] days after the date of the occurrence of the Event of Default, whichever is later.

Concession #2: Waive Security Deposit

Another method of enticement often used by owners faced with high vacancy rates is offering to give a security deposit concession. The agreement allows tenants either to forgo paying the security deposit altogether or to pay less money than would typically be required in a more stable market, explains McKee. For this concession to be effective, however, you must not lose your right to collect the security deposit if the tenant defaults.

For a Model Lease Clause you can adapt and use to protect yourself when offering this concession, see “End Security Deposit Concession for Undeserving Tenant,” Insider, March 2008, p. 5.

Concession #3: Provide Lease Termination Option

Most owners shy away from giving the tenant the option to terminate its lease before the end of the term. However, if a strong tenant with long-term potential comes to you with this request and the market is down, you might have to consider granting it. Luckily, there's a way to offer this option and still provide yourself with adequate protection. Your lease clause, like our Model Lease Clause: Give Tenant Lease Termination Option, should stipulate that, to exercise the option, the tenant must not be in default of the lease, must provide you with adequate notice, and must pay a termination fee.

Insider Source

Barry W. McKee Jr., Esq.: Law Office of Barry W. McKee Jr., 200 S. 3rd St., #200, Stillwater, MN 55082; (651) 329-4047.

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