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Before committing to a commercial lease as a tenant, you may need to negotiate some terms with your landlord. A commercial lease is not just a legal contract but is also a business transaction. Therefore, you want to ensure you enter a lease on the best terms for your business. During negotiations, you might consider requesting a rent-free period, otherwise known as rent abatement. This article will explain rent abatement in a commercial lease.
This cheat sheet outlines what you should be aware of in your lease agreement.
What is Rent Abatement?
Rent abatement is a period within your commercial lease where you, as a tenant, do not pay any rent to your landlord or you pay a reduced amount. You and your landlord negotiate and agree to the rent-free period before you enter the commercial lease. Rent abatement is standard for commercial leases where they are of a high value.
Why Negotiate a Rent-Free Period?
Besides the obvious financial benefit of a rent-free period, rent abatement can allow you to:
- help save money for your fit-out costs when you move in;
- persuade you to choose the property over another; or
- simply to secure the commercial lease for the landlord.
Rent abatement options can also act as incentives for a tenant to take on the lease with the landlord. Your landlord may see them as a way to attract commercial tenants. This is particularly where the property has been vacant for a lengthy period. If you are aware of this fact, you can use this as potential negotiating power to persuade the landlord to include rent abatement options in your lease.Continue reading this article below the form
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Rent Abatement Options
Rent abatement terms can differ from lease to lease. While a few options are available, you should negotiate for a scenario that best suits your business and financial circumstances.
One option is to negotiate a rent-free period at the start of your commercial lease. Notably, you will not have to pay this rent to your landlord later, and it is not a debt you have to repay. This type of rent abatement allows you to concentrate on setting up your business, particularly in the early stages when it may not make much money. Alternatively, if your business is already established, this type of rent abatement may give time for adjustment as your business settles into new commercial premises.
Rent abatement could also look like a reduction in your rental amount. For instance, you could negotiate to pay 60% of the rent during the first three months of the lease. While this seems like something a landlord would never agree to, it might be the better alternative than your business backing out on the lease and them having to find a new tenant. For every week or month a landlord is looking for a new tenant, that time results in lost income. Therefore, you can use this as part of your negotiating power to ask for a rent reduction.
Further, you might ask for rent abatement in the form of a rent-free period when exceptional circumstances arise. For example, if a flood affects your business, your landlord may agree to a rent freeze for a specific period. With the recent pandemic not far behind us, this reminds us of a circumstance when this type of rent abatement may apply.
What is a Clawback Clause?
If you negotiate a rent reduction for your commercial lease, be mindful that your commercial landlord is likely to insert a clawback clause in your commercial lease agreement. A clawback clause grants your commercial landlord a right to ask you for the difference in the money you saved during the rent abatement period in the commercial lease.
A landlord can only rely on a clawback provision if you end the commercial lease early after enjoying the rent abatement period. However, a well-drafted rent abatement clause should never expect you to repay your landlord for rent after the agreed rent-free period. Again, this rent-free period should not become a debt you owe your landlord.
When you enter a commercial lease as a commercial tenant, you may want to consider a rent abatement. Rent abatement is a reduction in rent or a rent-free period in the commercial lease. A rent abatement can save you money and stress when entering a new lease, particularly when you have other business priorities in mind. For a commercial landlord, it allows them to secure a tenant in their property and, possibly, for a long lease term. There are different forms of rent abatement you may negotiate, like an initial period of no rent or a reduction in the rent amount.
If you need help reviewing or drafting your lease agreement, our experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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