Signing a commercial lease is a financial commitment, and in the post-COVID age when many businesses are transitioning more and more to hybrid or remote work, it can seem tougher to find commercial tenants who stay. That’s where lease incentives come in handy, including rent abatement.
What is a rent abatement? Simply put, a rent abatement is a type of incentive that reduces the total amount of rent paid by the tenant to the landlord. Incentives are typically provided by Landlords to attract tenants into their office buildings, or when the market is soft and in favour of tenants. Rent abatements can be applied to commercial leases, and come in many types, but offering a reduction in total rent paid in order to incentivize tenants to rent a property is the main goal. Read on to find out everything you need to know about rent abatements and if they’re right for you.
What Does Rent Abatement Mean?
Rent abatement is a type of rent incentive. Landlords use rent incentives to encourage tenants to sign up to a lease or to sign on for a longer rental period. So what does rent abatement mean? A commercial rent abatement can mean that a tenant receives a permanent, fixed discount on the rent, a monthly discount on rent or a period of reduced rent. For example, a tenant could be offered the first six months of the rental agreement at a lower rental rate or have the equivalent amount of rent deducted over the period of the lease.
Landlords can use rent abatements as a sweetener for tenants to sign up to a longer term agreement and enjoy an early period of rental relief.
Rent abatements that stretch over the lifetime of the lease can be used to encourage tenants to sign on for a longer period of time, guaranteeing the property owners a long-term tenant.
These rent abatements are documented in confidential side deed agreed between both parties.
What Is The Difference Between Rent Abatement And Rent Free?
There is a difference between rent abatement and rent free. Rent abatement is typically applied as a short or long-term rental discount, while rent free periods are a different kind of lease incentive and offer as a period of 100% free rent.
Even if a rent abatement agreement includes a period of rent free, the tenant is still expected to pay rent after the grace period and is often still expected to cover the cost of utilities (like electricity & water).
Rent incentives in the form of rent free are negotiated typically as a rent holiday or rent reduction where the property owner and tenant come to an agreement on the rental incentives to include in the lease agreement.
Rent abatement typically works by offering a tenant a partial discount to the entire rental period.
The rental abatement period is determined during the lease negotiations with the commercial real estate manager or owner.
Commercial real estate owners can look to provide rental abatement as a concession to encourage new tenants or existing tenants to sign on to a new lease, particularly in areas where vacancy rates are higher. In Brisbane, above average generous rental concessions have been offered in suburbs like Milton when vacancy rates have spiked over the past 3 years.
What Are The Benefits of Rent Abatement for Landlords and Tenants?
There can be many benefits for both landlords and tenants in rent abatement arrangements. Though professional legal advice should be obtained prior to signing on to any rental agreement. Landlords can use rent abatement or rent relief to encourage tenants to sign a lease agreement. Rent relief or rent abatement can also be a tactic landlords can use to prompt existing tenants to sign on to new lease agreements.
Typically, landlords look to rent abatements as a mechanism to encourage tenants to sign on for longer term agreements. For tenants, a rental abatement period can be extremely valuable to bridge the gap while a business is getting established or for the peace of mind of locking in a longer-term rental rate that’s affordable. For landlords there are other benefits such as having a rent abatement period ahead of a guaranteed period of rental payments is often preferable to having no tenant at all.
A landlord may also use a rent abatement agreement to extend the life of the lease and encourage a tenant to sign on with a short or long-term rental discount.
In other circumstances, a rent abatement offered over the period of the lease can help to cut ongoing costs and reduce the amount of any potential future rent rises for tenants.
Like any other rental agreement, a tenant can be evicted if they stop paying rent. Landlords are entitled to commence the legal eviction process to remove a tenant if rent is not paid according to the signed rental agreement. Likewise, if a tenant breaks their lease early or is in default, they may be liable to pay back the value of the rent abatement period or concession. This legal term for this is a “clawback provision”. Rent abatement clauses can also include stipulations that tenants forfeit their abatement if their actions cause property repairs to be required.
This is why it’s important for both landlords and tenants to ensure they understand the pros and cons of any rental abatement agreement and obtain professional advice before signing.
Other Lease Incentives
Rent abatement is just one type of lease incentive. Landlords can use a number of different incentives to help encourage tenants to sign a lease or extend a lease. Landlords might offer what is called a “fit-out contribution” which helps a tenant pay for the installation of fittings and fixtures if they need to amend the property to host their particular business.
It allows the tenant to upgrade or make changes to the property with financial assistance from the landlord, who can then often charge a higher rent. This might be important if you are looking to put a specialist business in a particular location that requires services like plumbing or layout changes that require a carpenter.
Landlords can also offer a “rent free” period at the lease commencement, usually for a couple of months while the business is moving in or the fit out is being installed. Other lease incentives can benefit the landlord. For example, landlords might also insist on including a clawback provision in a rental agreement.
These clauses enable a landlord to force a tenant to pay back an incentive amount if certain conditions are triggered. For example, if you are in default on your rent, a clawback provision might require you to pay back lease incentives.
There are many different types of clauses and lease incentives that can be included in lease agreements, that’s why it is important to seek property and legal advice from experts before negotiating or signing a lease.There are also different ways of formally accounting for lease incentives, so getting advice from an accountant is also important.