Rent Abatement for Residential and Commercial Leases
Rent abatements are clauses that are sometimes included in an apartment or commercial lease that allow tenants to either not pay or pay only a fraction of the lease amount for a specific amount of time.
Rent abatement clauses are commonly activated if a property becomes uninhabitable or unusable due to various circumstances, including natural disasters like floods, hurricanes, or fires. Sometimes, rent abatements are requested without clauses in the lease. In other cases, they may be required under certain circumstances due to state or local regulations.
The cost of a rent abatement may be handled directly by the landlord, but it’s more commonly paid by the landlord's business liability insurance. Specific damages to a commercial tenant's business will typically be covered by the tenant’s liability insurance. A commercial tenant will generally need to have a separate business interruption insurance policy in order to cover the costs of being out of business during the period in which the building is repaired.
In this article, we’ll discuss:
Bargaining for Rent Abatement Upfront
Rent Abatements for Residental or Apartment Tenants
Rent Abatement Caveats
Amortized Rent Abatements
Why Rent Abatements Do Not Cover Personal Property
Why Rent Abatement May Not Cover Utilities and CAM Fees
Rental Abatement and Clawbacks
Negotiating Rental Abatements With Landlords After Damages
Rent Abatements, Credit Tenant Leases, and Triple Net Leases
Rent Abatements vs. Tenant Improvement Allowances
Rental Abatements vs. Rent Concessions
Rent Abatement and Property Improvements
Going to Court for Rent Abatement
Bargaining for Rent Abatement Upfront
If you’re a potential tenant in the middle of leasing negotiations, bargaining for a rent abatement may not be the first thing you want to ask for, as this is usually reserved for situations in which the property is damaged. Instead, you might want to ask for a tenant improvement allowance or an overall rent reduction. If these don’t work, you may want to try asking for an abatement. Conversely, if you’re the landlord, a rent abatement can be expensive, so it generally isn’t the first thing you want to offer up in the negotiations.
Rent Abatements for Residental or Multifamily Tenants
Residential tenants, including tenants in single-family homes and apartment buildings, are entitled to live in a habitable property. If a landlord does not repair the property in a timely manner, the tenant may be entitled to a rent abatement for the full costs of the repairs to the property that they themselves must hire out. In addition, a rental abatement may cover the temporary housing costs of the displaced tenant, such as the cost of living in a hotel, motel, or short-term rental while the property is being repaired to a livable condition.
Amortized Rent Abatements
In some situations, landlords and tenants can negotiate amortized rent abatements. This involves the landlord providing a rental abatement upfront, in exchange for increasing rents by a certain amount for the remainder of the lease’s term. This takes the pressure of tenants while still providing a landlord reimbursement for some or all of their lost income.
In the case of commercial tenants requesting an amortized rent abatement, the landlord may wish to see financial documentation to ensure that the tenant will be able to afford the increased rent in the future. These include:
Business plan
Current year budget
Financial statements
Operating expenses
Year-to-year sales and revenue comparisons
Rent Abatement Caveats
It’s important to realize that there are a variety of situations in which a rent abatement may not be given due to certain clauses, or caveats, in the rental agreement. These generally involve situations in which the tenant is partially responsible for the damage that was caused.
For example, in areas where hurricanes are a serious problem, such as Florida, the tenant may be required to install hurricane shutters or place appropriate coverings on windows if a hurricane warning has been issued. If they do not do this and the property suffers hurricane damage, they would likely not be eligible for a rent abatement.
In another example, if a property or unit has been rendered uninhabitable due to a pest infestation, and it can be shown that this infestation was related to actions or inactions of the tenants (such as leaving out food), they would also not likely to be eligible for a rent abatement.
Other examples involve damage, leakage, or explosions for industrial properties that may be the result of faulty operation of machinery or carelessness when utilizing corrosive, flammable, or explosive materials.
Residential Rental Abatements Do Not Cover Personal Property
In general, rental abatements for residential and apartment tenants do not cover personal property, such as cash, jewelry, furniture, art, and collectibles that may be damaged in an emergency. Instead, a tenant will need separate renters or property insurance to cover these costs.
A tenant’s business property insurance or a residential renter’s rental property insurance will generally cover things such as:
Flooding
Theft and vandalism
Snow, ice, or sleet damage
Fire or lightning
Aircraft or vehicle damage
Explosions
Rental abatements generally only cover structural repairs, such as damage from flooding, mold, roofing damage, fire damage, and other types of damages. As previously mentioned, a commercial tenant will typically need to have a business interruption insurance policy to cover
Rental Abatement May Not Cover Utilities and CAM Fees
Rent abatements may relieve a tenant of the responsibility for paying some or all of their rent for a specific period of time, but this doesn’t mean there aren’t other expenses that they may need to cover. For example, a tenant may still be responsible for common area maintenance (CAM) fees, as well as making utility payments, particularly if utilities are paid separately from the lease.
Tenant Rent Abatements May Last Weeks or Months
There is no set length in which a rent abatement will last. Tenant rental abatements often are calculated by the time of the lease. For instance, a 10-year lease may qualify for 8 months of rental abatement, while a 2-year lease may only qualify for 2 months of rental abatement.
In some situations, the rent abatement will last until the property has been fully rehabilitated to either its original condition or, at the very least, a habitable and useable condition for the tenant.
The length of a tenant rent abatement will generally be determined by factors including:
The period of time the issue has been present and unresolved.
The severity of the specific problem
The extent to which the property or unit is rendered uninhabitable or unusable
Rental Abatement and Clawbacks
In some situations, a landlord may be able to “clawback,” or force repayment of any rent abatements they offered a tenant. This is particularly the case for commercial leases. In these cases, a clawback clause may be included in the rental contract and may be activated under certain circumstances, such as if the tenant defaults on their lease by missing rental payments, or if they attempt to assign, sublet, or terminate their lease before the end of the lease agreement. In some cases, the landlord may also be able to charge additional penalties and fees on top of being reimbursed for the rent abatement.
Negotiating Rental Abatements With Landlords After Damages
A rental abatement may or may not be in the landlord’s best interest. In many cases, a renter can negotiate a rental abatement if they can convince the landlord that the abatement will help the tenant, who may have trouble paying their monthly rent, begin paying their rent again more quickly. Of course, the landlord may calculate the cost of the potential abatement against the costs of potentially evicting the tenant and finding a new one. This eviction and lease-up process can be extremely expensive, so in many cases, the landlord simply agrees to a rent abatement in order to avoid the potential costs and headaches of eviction and finding a new tenant.
Rental abatement can be full or partial. For instance, if a landlord is not willing to provide 100% rental abatement, a tenant could negotiate a 50% rental abatement for a specified amount of time. This may be calculated as a function of the reduced value of the rent, particularly for commercial tenants.
The success a tenant has in negotiating a rental abatement is often correlated to the current state of the real estate leasing market in their specific area. For instance, if there are few properties available for rent (i.e. a seller’s market), landlords are less likely to provide rent abatements. However, if there are many available properties in the area, a landlord may be more likely to give a tenant a rent abatement so they are less likely to either break their lease or fail to renew it.
Despite all of this, it’s important to remember that rental abatement clauses are best hashed out during the leasing agreement process, not after a disaster has occurred.
Rent Abatements, Credit Tenant Leases, and Triple Net Leases
Rent abatements are not particularly common in triple net (NNN) or credit tenant leases, as these lease variations generally make the tenant responsible for paying all expenses under all circumstances. In general, the tenant's business insurance, not the landlord’s insurance, may be responsible for covering rental payments if a property becomes uninhabitable. Much like with typical (not CTL or NNN) leases, actual damage to the business will generally be covered by the business’s liability insurance.
Rent Abatements vs. Tenant Improvement Allowances
Rent abatements are not the only situation in which a landlord pays or credits a tenant. Unlike a rent abatement, which may be paid out in the case of an emergency, a tenant may be provided a tenant improvement (TI) allowance from the landlord, which can assist them with the build-out costs during the initial leasing period. Build-out costs are the costs for a tenant to “build out” or improve a commercial property to their required specifications. Sometimes, build-out costs are fully covered by the landlord, but in other cases, the tenant will be required to reimburse the landlord for these over time in the form of additional rental payments.
Rental Abatements vs. Rent Concessions
Rent abatements are similar to, but not the same as rent concessions. Like tenant improvement allowances, rent concessions are typically provided at the beginning of a lease for commercial tenants during the period in which the property is being built out to the tenant’s specifications. In contrast, rent abatements are used to compensate a tenant if the property has been rendered uninhabitable or unusable
Rent Abatement and Property Improvements
In some situations, a tenant may be able to negotiate rent abatements or greater rent abatements, if they agree to make some of the repairs themselves to a property that has been significantly damaged. This can relieve the landlord of the time and effort of taking care of the issues personally, and they may be willing to compensate the tenant in the form of rent abatements.
Going to Court for Rent Abatement
Tenant-landlord laws vary greatly between different states and municipalities. In some states and municipalities, there is specific legislation for rental abatement situations. For instance, some cities may mandate that a tenant asks for a city inspection before requesting a rental abatement. If the city found that the property had become uninhabitable and that the tenant was not at fault due to negligence, they could require the landlord to make repairs in a certain period of time. If the landlord does not comply, the tenant may be able to sue the landlord.
In some situations, rent abatement hearings are held in front of the local health and public safety committee, which can arbitrate the case and determine a result. Before contacting state or city officials, a tenant should usually attempt to deal with the landlord directly.
Why Tenants and Landlords Should Track Property Damages in Rent Abatement Situations
Whether you’re a tenant or a landlord, if a property has been damaged, it's important to make timely records of these damages, including taking detailed properties of any damages. For the landlord, this will help to determine whether the damages are in any way caused by the negligence of the tenant, and for the tenant, it can prove the severity of the actual damages which could support their request for rent abatement. This information can be essential if the case goes to court.
Rent Abatement in Relation to Acquisitions, Sales, and Property Financing
If you’re attempting to purchase a property that may be slightly damaged, it’s important to determine whether the current owner has offered any rent abatements to the current tenants, as this could adversely impact the rental income you receive if you end up purchasing the property. Likewise, if you’re attempting to refinance a property, you will need to add any rent abatements to your rent roll and proforma financial projections, as this will directly impact your property’s DSCR (debt service coverage ratio), which will likely impact the leverage and terms of any loan a lender might issue you.
If you are attempting to sell a property and you have issued a rent abatement to current tenants, you will also need to include this in your property’s offering memorandum (OM), so the purchaser and their lender know exactly what they’re getting into.