As we at LPC ANZ focus on our “Reset” theme at this appropriate time of the year (and as we emerge into a new commercial reality post-pandemic), we are encouraging our clients to review their property strategy, ensure it is aligned with new business goals, and adjust if necessary. This could well result in an organisation requiring new premises, warehouses or factories as they downsize, upsize or right size for the future. One of the primary incentives being offered by landlords looking to entice tenants is rent abatement. In this article we will explore the concept and evaluate the merits of rent abatement.
What is Rent Abatement?
A rent abatement is a period during which the landlord does not charge a tenant rent. The tenant is able to occupy the premises and conduct business, but rent is deferred for a set period of time. In some instances abatements are offered if there are repairs, maintenance or renovations in progress which may hamper the tenants ability to use the space as required. In most cases the abatement period is taken over the first few months of a lease, but it could also added as an extension period to the end of a lease.
“On the face of it, the concept of “free rent” sounds like a good deal for a tenant, and many real estate agents will position it as such. However we advise any tenant to exercise caution, and to triple-check the terms of any lease with an abatement - the devil is in the detail.” - Ken Lam, Director LPC
Why Rent Abatement could be a “golden handcuff”
As a tenant it is useful to consider the reasons why a landlord may be offering an abatement in the first instance.
The landlord’s objectives are to secure a tenant at as high a rent as possible, for as long as possible, in order to maximise their investment. An abatement could well be a marketing exercise eg “buy now, pay later”, designed to entice a tenant but where the landlord extracts value by charging higher rents for the balance of the lease. Similarly it could be designed to lock a tenant into a longer lease period (especially if the abatement is offered at the end of the lease term). An abatement could also be offered by a landlord looking to avoid more expensive incentives such as fitouts, additional facilities or renovations.
What to watch out for when considering a lease with a rent abatement incentive
Says Dylan O’Donell, Managing Director LPC Melbourne, “As independent tenant representatives our role is to get the best possible lease deal for our clients, and that often includes abatements. We look at factors beyond only the financials. We also scrutinise contractual terms to ensure the tenant is protected”.
Protection for the tenant under an abatement lease is crucial. Fineprint can be tricky, and could leave a tenant exposed. For example, in a conditional abatement the tenant may need to uphold certain responsibilities such as maintenance or repair of the premises. Clauses relating to this need scrutiny, to avoid any risk of blame shifting to the tenant, and therefore losing the abatement.
Similarly, clauses around disaster damage and resulting abatements could be included in the lease. These need to be clear ie when damage is neither the tenant nor the landlords fault, is there a provision for abatement?
Also to be wary of are clauses around any potential breach of the contract by the tenant, and what that could mean in terms of the landlord recouping the abatement incentive by way of “claw backs”.
Our view as tenant representatives is that rent abatements can be an incentive benefiting the tenant - often at a time when a saving could go towards relocation expenses. However they come with a warning - be sure that you know exactly what you’re getting into, and ensure you get sound, independent advice.
To get more information on tenant-friendly leases, click here to check our available resources.
At LPC, we partner with tenants and occupiers across Australia and New Zealand to optimise their office, industrial and retail property portfolios providing an integrated suite of services including transaction management, portfolio and lease management and project management. We provide conflict-free advice and representation, meaning we have no ties with owner-developers or landlords. Tenants and occupiers interests remain at the core of what we do as we negotiate on your behalf and endeavour to rebalance the scales in a market which favours landlords.