Let’s examine abated rent on commercial leases from both the landlord’s perspective and the tenant’s perspective. The abated amount can be recaptured if a tenant defaults on the agreement.
Abated Rent: A Landlord’s Perspective
In today’s market, it is common for landlords to give fully or partially abated rent as a lease concession to tenants. Occasionally the abated amount is staggered throughout the term (e.g., one month’s rent is abated every year), but more often the abated rent is front-loaded at the beginning of the term. The Landlord would like to have the Abated Rent Recaptured If Tenant Defaults but the Abatement is factored into the overall economics of a lease deal, based on the tenant’s payment of rent during the entire length of the term. Landlords should make sure that the lease allows the landlord to have the abated rent recaptured in the event of a tenant default.
A common mistake that landlords make with respect to abated rent is they state that the rent during the abated period is $0, free or abated. Instead, the lease should provide for a rent amount, but state that the rent is abated if tenant fully and faithfully performs for the entire term of the lease. If the tenant defaults, then the landlord can recapture the abated amount in its damages.
Abated Rent: A Tenant Perspective
The same type of situation can occur with a Tenant. They should be careful to negotiate these provisions as well. First, the tenant should require that the landlord may only recapture the abated portion if the landlord terminates the lease due to a tenant default. The full and faithful performance language is ambiguous and a late payment of rent for 1 day (or similar minor breach) could be interpreted as a trigger event. It would be unfair for the landlord to claim that the abated amount is due unless the breach is material and the tenant has an opportunity to cure and fails to do so.
Second, the tenant should negotiate that the landlord’s ability to recapture the abated portion is reduced over time, since the landlord is receiving the benefit of the lease over time. For example, if the lease has a 10 year term and tenant performs for 7 years before breaching, the tenant could negotiate that the landlord received 70% of the intended benefit of the lease and should only recapture 30% of the abated amount. This is a business issue for the landlord and tenant to negotiate. To avoid having a Landlord have the Abated amounts Recaptured If Tenant Defaults, the tenant should consult an attorney to make sure the appropriate language is in place to protect their interests.
Prior to using any language or concepts from this blog entry, consult with an attorney.
Investing In Commercial Real Estate?
Looking to invest in Arizona Commercial Real Estate? At ICRE Investment Team, we work with commercial investors, property owners, companies, banks, and commercial loan servicers seeking the highest quality of services in the greater Phoenix, Scottsdale, Mesa and Tempe Arizona regions. Contact us for more information.