What Is Rent Abatement in a Commercial Lease?

In leasing conversations, the two phrases are generally used interchangeably. A proposal offering "six months free rent" and one offering "six months of rent abatement" are usually describing the same concession: months in which part or all of the rent is not charged.

The word abatement is also used in another sense. A lease may abate rent when the space cannot be used, for example after a casualty or a service failure. That is a remedy, not an incentive, and it lives in a different section of the lease. This guide is about the negotiated kind, since that is what most searchers mean by rent abatement.

It is also worth being clear about the economics. Mintz & Gold, writing for tenants, makes the point bluntly: tenant incentives are not really free. They are in effect advances by the landlord that are recovered through the rent over the term. That does not make abatement a bad thing, but it should be judged as part of the whole deal.

Six months of abatement can be delivered in several ways, and they do not all have the same value to you.

• Up front. The months come at the start of the term, which helps most with moving costs and any overlap with your old lease.
• Spread out. The months are scattered through the early years, for example one month at the beginning of each year. This is less helpful for early cash, and leaves more of it exposed to a later default.
• Partial. Rent is reduced by a share for a longer period, for example half rent for a stated number of months.
• Partial space. The abatement applies only to part of the premises, which is common with phased occupancy.

Timing has another effect that is easy to miss. If rent escalations are measured from the commencement date, the abatement can use up part of your first lease year at the lowest rent. Mintz & Gold suggests that a six-month abatement should ideally be followed by a full twelve months at the initial rate. Ask how the rent schedule treats those months.

This is the most common misunderstanding. Many abatement clauses cover base rent only, and other charges continue. A clause may say that the tenant remains responsible for all of its other monetary obligations during the abatement period. Mintz & Gold notes that your lease may or may not abate additional rent, and that the obligations should be specified.

Costs that may continue during abatement include these.

• Operating expenses, CAM, taxes and insurance, in a net lease.
• Electricity and other utilities, and any after-hours services.
• Parking charges.
• Your own costs, such as business insurance.

The figures below are hypothetical, for illustration. A 5,000-square-foot tenant has base rent of $20.00 and estimated nets of $8.00. Base rent is $100,000 a year and the nets are $40,000. Six months of base rent abatement waives $50,000, and the tenant still pays $20,000 of nets over those six months, which is about $3,333.33 a month. "Free" in this case does not mean zero.

Ask this exact question: during the abatement period, what will our monthly payment be, in dollars?

Many leases treat abatement as conditional on your performance. If you default, the landlord may be able to demand some or all of the abated rent back. This is sometimes called clawback or recapture. Clauses vary a great deal in how they measure what is owed.

• Full repayment. Some clauses make all free rent immediately due on any event of default. Others treat inducements as conditioned on the tenant’s full performance and say they become payable even if the breach is later cured.
• Unamortized amounts. A clause may also make the tenant owe the unamortized portion of the landlord’s costs. Tenants can ask that any repayment of abatement be limited in the same way, to the part not yet earned over the term.
• Paused, not lost. Mintz & Gold argues that a tenant’s abatement should be tolled during a default and picked up after cure, and it calls repayment after termination a double penalty.

Dental & Medical Counsel warns that many landlords will use a technical default to force repayment of inducements, and that not all leases provide a cure period. Attorney Michelle Itkowitz, writing from the landlord’s side, describes demanding free rent back as her first step when a start-up tenant defaults.

A hypothetical example shows how much the wording matters. Rent of $12,500 a month with six months abated is a concession of $75,000 on a 60-month term. A tenant defaults at the end of month 24. Under a full-repayment clause, $75,000 could be claimed. On a straight-line unamortized measure with no interest, 36 of 60 months remain, so the figure is $45,000.

Landlords often view abatement and tenant improvement allowance as interchangeable, since both are money invested in the deal. For a tenant, they do different jobs, and the mix should be agreed at the proposal stage.

• Abatement helps cash flow during the first months and can reduce overlap with an old lease. It does not build anything.
• An allowance pays for construction you would otherwise fund yourself, and may be tied to documentation and deadlines. Unused amounts may be lost, unless the lease lets you convert them.
• A landlord may be more willing to give one than the other, depending on its financing and whether the space is already built.

You can also trade term for concessions, which is a common way for a tenant to get free rent without a harder negotiation over rate. One Tenant Advisory Group client described such a trade this way.

This kind of trade works only if the added term suits your plans, so weigh the flexibility you are giving up. When we negotiate abatement for tenants at TAG, we compare each option on a net effective basis and read the default language alongside it.

• ✓Does abatement cover base rent only, or also operating expenses and other charges?
• ✓When does it occur, and does it delay or use up time at the lowest rent step?
• ✓What triggers loss or repayment: any default, or only a monetary or material default after notice and cure?
• ✓If we default and cure, is our abatement paused or lost? Mintz & Gold suggests it should pick up again after cure.
• ✓What is owed on repayment: the full amount, or only the unamortized portion?
• ✓Could we owe interest on any repayment, and is unamortized tenant improvement or commission cost added?
• ✓Does a repayment clause double-count when the landlord also claims future rent?
• ✓If the lease is assigned or subleased, does the abatement stay available?

Enforceability of a repayment clause can depend on the lease and on state law, so ask your attorney how it would apply to yours. Your CPA can tell you how the abatement affects rent expense on your books.