What Is Rent Abatement?
Rent abatement is a provision that may be included in a commercial or residential property lease. It entitles the tenant to suspend rent payments or pay only a portion of the rent until a landlord completes property repairs.
Let’s take a closer look at rent abatement and what it means for commercial and residential property tenants.
WHAT DOES IT MEAN TO HAVE RENT ABATEMENT?
Rent abatement usually is outlined in the terms of a commercial or residential property lease. It may consist of clauses that define whether a landlord will reduce a tenant’s rental costs or eliminate these costs temporarily if a property becomes uninhabitable.
With rent abatement, a tenant is protected if a property is damaged due to fire or flooding. Also, rent abatement safeguards a tenant against natural disasters such as earthquakes, hurricanes and tornadoes, along with forced property evacuations by a city or county government.
In a commercial property lease, a landlord’s business liability insurance often covers rent abatement. Thus, the costs associated with property damage would be paid by the insurer, as long as the landlord pays the insurance policy’s deductible. It is important to note a tenant would need renter’s insurance or business liability insurance to cover the costs of damaged property in this scenario. The tenant also may need business interruption insurance to cover the expenses associated with financial losses that a company could suffer while a property is repaired.
PROVIDING GUIDELINES FOR LANDLORD AND TENANT
Rent abatement in place as part of a commercial lease keeps the landlord-tenant pact in place until a property can be used once again. It provides clear guidelines about which costs a landlord will cover — and which they will not. For full protection of all property and belongings, a tenant will need to purchase a combination of:
- Renter’s insurance
- Business liability insurance
- Business interruption insurance
In a residential lease, a tenant is entitled to a habitable property. If a landlord fails to perform repairs and maintain safe, healthy living conditions, a tenant may be able to deduct the costs of repairs from the rent.
A tenant’s ability to abate is based on the property’s condition and may be included in the terms of a rental agreement. Furthermore, rent abatement is enforceable in every state.
HOW LONG DOES RENT ABATEMENT LAST?
There is no set amount of time a rent abatement period may last. In many instances, a rent abatement period could extend for weeks or months, depending on the property’s condition and the time it takes to finish repairs. As such, the money a residential property tenant saves during a rent abatement period may need to be applied to temporary housing costs, such as expenses associated with living in a hotel or a short-term rental property.
In addition, the amount of rent reduction during abatement may vary. In some cases, a
landlord may reduce a tenant’s rent by a certain percentage. For instance, if half of an apartment is no longer inhabitable due to faulty plumbing, a landlord may reduce the rent by 50 percent.
A landlord also may calculate the abated rent of a property to determine the diminished value of the rent. For example, if a rental property’s fair market rent is $2,000 but the living space’s diminished condition reduces its value to $1,000, the tenant may receive 50 percent off the rent.
CAN RENT ABATEMENT HURT ME?
Rent abatement is designed to help residential and commercial renters, not hurt them. Therefore, rent abatement frequently helps renters obtain extra assistance if a property is damaged and becomes uninhabitable.
On the other hand, rent abatement alone can only do so much, and renters will need extra protection to cover the costs associated with potential damage to their belongings.
To better understand this point, let’s consider an example. If a fire damages a renter’s property, they may receive a portion of the costs associated with damages as part of rent abatement. Conversely, a tenant’s desktop computer, jewelry and other personal belongings will not be covered by rent abatement. In fact, a tenant may be forced to pay the costs to replace these items out of their own pocket.
Luckily, many insurance options are available to protect both commercial and residential renters and their personal belongings. Some of the most common insurance options include:
Renter’s insurance covers personal property losses. It commonly serves as a viable insurance option for residential and commercial tenants, enabling them to safeguard their personal property while they are at home or while they travel.
Ultimately, renter’s insurance protects a tenant against property losses caused by:
- Aircraft or vehicle damage
- Fire or lightning
- Ice, snow and sleet
- Windstorm or hail
Renter’s insurance will protect a tenant in the event that they are unable to live in a home temporarily. As a result, it may serve as a viable substitute if rent abatement is not included as part of a lease agreement.
Tenants probably won’t have to worry about breaking their budgets to purchase renter’s insurance, either. A recent Nationwide survey indicated 56 percent of young adult renters lack renter’s insurance. The survey also showed renter’s insurance costs about the same amount as a pair of movie tickets each month.
Business Liability Insurance
Business liability insurance serves as an umbrella policy that offers coverage in a variety of areas, including property damage. With business liability insurance, a tenant is protected in the event damage occurs to a physical location they rent for business purposes.
A business liability insurance policy usually offers coverage against losses caused by:
- Aircraft or vehicle damage
- Fire or lightning
- Windstorm and hail
Tenants can add business liability coverage for water damage, falling objects and other potential hazards as well.
Purchasing business liability insurance may prove to be ideal for commercial renters. It enables tenants to protect themselves against losses if a commercial property is damaged or destroyed. Plus, business liability insurance safeguards a tenant against the loss of any personal property that has value, such as computers and TVs.
Business Interruption Insurance
Business interruption insurance is essential for commercial renters because it delivers financial protection if a company is forced to close temporarily due to property damage or destruction.
With business interruption insurance, a commercial renter is protected against lost compensation if they are forced to vacate a building. The insurance covers the revenue that a tenant would have earned based on their financial records. It also covers the costs associated with operating expenses like electricity that may continue even if business activities are forced to stop temporarily.
When it comes to business interruption insurance, a tenant should set sufficient policy limits. If a tenant purchases only enough coverage to handle the costs for a few days after a business is interrupted by a disaster, they may run out of funds before the company can return to its everyday operations.
The costs of business interruption insurance may vary, and Trusted Choice notes that business interruption insurance costs can range from $750 to $10,000. These expenses will depend on the size of a business, its location and the risks it faces day after day.
HOW TO QUALIFY FOR RENT ABATEMENT
Rent abatement should be a major consideration during lease negotiations. At this point, a potential renter has leverage they may be able to use to negotiate favorable rent abatement terms.
There is no set formula for a rent abatement amount, but the total often is based on the terms of a lease agreement:
- In some instances, rent abatement may be extended based on the length of a lease. If a landlord offers a one-year lease, a tenant may qualify for rent abatement for one month.
- Or, if a landlord provides a five-year lease, a tenant may receive rent abatement for five months.
- Keep in mind that no two lease agreements are identical, however, and rent abatement should be discussed between a landlord and tenant to ensure that rent abatement terms satisfy the needs of all parties.
When discussing rent abatement, it is paramount to consider the landlord’s position. A landlord is responsible for taking care of a space and finding tenants who will maintain the space and pay the rent on schedule. They may perform extensive research to find the right tenants and perform background checks that could become time-consuming and costly. Despite a landlord’s best efforts, there are no guarantees they will be able to find suitable tenants quickly.
Proposing rent abatement terms during lease negotiations may help a renter set the stage for a mutually beneficial partnership with a landlord. Rent abatement serves the needs of both parties, enabling a tenant and landlord to get the best results possible if property damage occurs.
BENEFITS OF RENT ABATEMENT FOR BOTH SIDES
By offering rent abatement to tenants, a landlord may stand out to potential tenants. Providing rent abatement as part of a rental agreement may make it easier for a landlord to secure agreements with the ideal tenants, i.e. those who will follow the terms of a rental agreement closely.
For tenants, rent abatement offers unparalleled protection, especially if it is included in a rental agreement. And with clear-cut rent abatement terms in place, a tenant may be able to avoid legal headaches down the line.
Unfortunately, if rent abatement is not included in a rental agreement, a tenant and landlord may need to go to court to resolve a property damage dispute. In this scenario, a renter can request an amount to abate in small claims court or superior court. A tenant also may file for retroactive rent abatement, which offers a refund for rent already paid while a rental property was in subpar condition.
GOING TO COURT FOR RENT ABATEMENT
Some jurisdictions have protocols in place for tenants who want to take a rent abatement case to court. For example, a tenant may be required to request an inspection by city officials if a landlord fails to resolve a property damage problem. And if the landlord still does not comply with the city’s requirement to repair the property, a tenant then can bring the case to court.
A rent abatement hearing will be held in front of a health and public safety committee. This group will hear both sides of the case and decide the outcome.
If a tenant believes that they are eligible for rent abatement for property damages, all of these damages should be tracked properly. A tenant will need to inform their landlord about property damage in writing as part of a rent abatement letter. The letter should be clear and direct and provide a list of property damage that defines what makes a living space uninhabitable.
After a rent abatement letter is submitted, a tenant should follow up with their landlord directly. Doing so may enable a tenant to explain why they feel entitled to reduced rent. It may even enable a tenant and landlord to agree to terms before a rent abatement case is brought to court.
HOW TO NEGOTIATE RENT ABATEMENT
A tenant should consider numerous factors to negotiate rent abatement terms successfully.
In a seller’s real estate market, a scarce amount of high-quality properties may be available. Comparatively, in a buyer’s market, potential renters may have many great options at their disposal. Examining the real estate market closely may enable a renter to differentiate a seller’s market from a buyer’s market. In most cases, a renter may be better equipped to negotiate favorable rent abatement terms in a seller’s market than a buyer’s. Here are a few ways to do it:
PROVIDING IMPROVEMENTS FOR RENT ABATEMENT
Generally, a landlord may be more inclined to offer rent abatement if a tenant agrees to complete property improvements on their own. Property improvements may be expensive and time-intensive, but a tenant who agrees to complete these tasks could abate their rent during this timeframe.
By completing the property improvements, the tenant will enhance the property’s value. Meanwhile, the tenant will not have to worry about all or a portion of rent during that time, as they will be covered by rent abatement terms in the lease agreement.
THE RENT ABATEMENT DOWN ECONOMY ARGUMENT
A tenant may be able to negotiate rent abatement based on a “down economy.” This may serve as a partial rent abatement due to difficult economic circumstances. Rent abatement due to a down economy may provide a valuable option for business operators.
If a commercial renter is able to defer a rent payment for several months, they may be able to reinvest the short-term savings into the business. And when the deferred rent payment eventually is due, the tenant may be better equipped to provide this payment and greater payments in the future.
RENT ABATEMENT VS. THE ALTERNATIVES
Lastly, corporate landlords may prefer rent abatement terms over alternatives. These landlords often face high fixed building costs and low-variable building expenses, and may not cover the costs associated with utilities and janitorial services.
But if corporate landlords provide rent abatement, they may be able to help their properties stand out to potential renters. And over an extended period of time, a corporate landlord’s decision to offer rent abatement to tenants may make it easy to generate substantial interest from corporate renters.
LEARN ABOUT RENT ABATEMENT AND MUCH MORE FROM 33 REALTY
Landlords and tenants alike may struggle to grasp the ins and outs of rent abatement. Fortunately, 33 Realty serves as a fully integrated real estate company that delivers a one-stop shop experience. We provide many high-quality services to ensure landlords and tenants can learn about rent abatement and other real estate topics.
Please contact us today to find out how we can help you with investment real estate or construction services.