Rent abatement is a lease condition that a tenant can invoke in certain commercial and residential leases. Typically, the tenant can make partial payments or suspend payments altogether until essential repairs are completed. Here’s an overview of rent abatement and what it means for landlords and tenants.
What Is Rent Abatement?
In most cases, rent abatement terms are outlined in the text of your lease. These terms will often consist of a series of clauses outlining the tenant’s right if their residential or commercial property becomes unfit for occupation.
Under rent abatement rules, a tenant pays reduced or zero rent if their home is damaged due to a fire or a natural disaster. Floods, earthquakes, tornadoes, and other acts of God are normally covered. So are general evacuation orders given by the government.
In the event of damage to the real estate, the landlord is responsible for the costs of repair, and their business liability insurance typically covers the cost. That said, the landlord is not responsible for the tenant’s personal belongings that may have been damaged. They also aren’t liable for the cost of business interruption to commercial tenants. Those costs would be covered by renter’s insurance and business interruption insurance, respectively.
When Is Rent Abatement Applied To A Property?
Different leases can have different rent abatement terms. That said, there are certain conditions that are normally covered, including:
Your rental property is damaged by a fire or natural disaster.
Your property has a significant repair issue that the landlord has not fixed. This means major problems like a broken hot water heater or non-functioning furnace.
You experience a mold infestation that renders the building unfit for occupancy.
A government evacuation order forces you to vacate the building.
What all of these situations have in common is that through no fault of the tenant’s, the property has become unusable. These situations also have to have a significant enough impact to affect the entire property. For example, let’s say your laundry machine is broken, and your landlord hasn’t fixed it. Driving to the laundromat is annoying, but it doesn’t render your home unlivable, so you wouldn’t qualify for an abatement. Similarly, if a small fire damages a few rooms in a large office building, the bulk of the building can still be used, so there would be no abatement.
Most leases give a grace period for the landlord to make repairs before abatement kicks in. This can depend on your lease terms, but grace periods as long as 30 days are not uncommon.
Some commercial leases may have an abatement period built into the beginning of the lease. For example, a tenant may need six months to perform environmental abatement on an old gas station before it can be converted to a bakery. In this case, the landlord doesn’t get paid, but they benefit from increased property value.
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Rent Abatement Guidelines For Landlords & Tenants
Rent abatement clauses protect both landlords and tenants from paying unreasonable charges. For the tenant, this means not having to pay for a property they can’t use. For the landlord, this means not having to pay for damage to anything other than the real estate. This means that commercial tenants will need the following three types of insurance:
Business liability insurance
Business interruption insurance
In a residential lease, the tenant will only need to obtain renter’s insurance. Residential tenants can also make reasonable health and safety improvements if their landlord fails to act. For example, if the landlord fails to repair a broken faucet, the tenant can fix it themselves and take the cost out of their next rental payment. The exact terms will be outlined in your lease.
What Is The Difference Between Rent Abatement & Deferral?
A rent abatement is a temporary stoppage or reduction of rental payments. This most commonly happens when the property has been rendered unusable by a fire or natural disaster. It’s also a complete forgiveness of some portion of the total lease cost.
On the other hand, a deferral is a temporary rent reduction that has to be repaid later on. The result is that the total least cost remains the same. This isn’t as attractive to tenants as an abatement. On the other hand, it can be easier to negotiate terms for a deferral than for an abatement if you’re a tenant.
Is Rent Abatement The Same As Free Rent?
Not exactly. However, if a rent abatement period is negotiated into the terms of a commercial lease, it counts as free rent. Landlords will offer free rent for several reasons, but what it comes down to is that they want to attract tenants and obtain higher-quality tenants.
Landlords will also use free rent to increase the price per square foot. Oftentimes, the total cost of the lease remains the same, but the “free” rent is simply spread out through the course of the lease. This can still be beneficial for tenants, though. The abatement period gives you much-needed time to renovate your new space, which can be essential for businesses like bars and restaurants that require special equipment.
The amount of free rent you can negotiate will depend partly on the length of the lease term. Normally you’ll need to be renting for at least three years, at which point you can get a month or two of free rent. On a long-term 10-year lease, you might be able to negotiate as many as six months.
How Long Does Rent Abatement Last?
In a word, it depends how long it takes to make the property useable again. If it takes two weeks, the abatement will last for two weeks. If a rental house is obliterated by a tornado and needs to be entirely rebuilt, it could last for several months.
In some cases, the abatement can mean a reduction of payments instead of a stoppage. This happens when a property has been rendered significantly, but not entirely, unusable. For example, the bottom half of a split-level home might be damaged by a flood, while the upstairs remains intact. In that case, because half the house is unusable, the rent could be reduced by half. As an alternative, some landlords will discount the rent by the reduction in the property’s fair market value.
What Costs Does Rent Abatement Cover?
Rent abatement covers the cost of the loss of use of the property – in other words, the cost of rent. It doesn’t cover damage to your personal property. For example, if your apartment burns down, you’ll qualify for rent abatement. But to replace your furniture, electronics, and other personal belongings, you’ll have to file a renter’s insurance claim and pay the deductible.
The same rule applies to commercial leases with regard to your business’ property. To cover those costs, you’ll need business liability insurance. You’ll also need business interruption insurance so you can meet your other financial obligations while your facility is out of commission.
Finally, tenants aren’t eligible for rent abatement if they’re the ones who caused the damage. For example, if you hire an unlicensed electrician who causes a building fire, you’ll still have to pay rent – as well as facing other potential liabilities.
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How To Qualify For Rent Abatement
The best way to qualify for rent abatement is to negotiate it into the terms of your contract. Your odds of getting favorable terms will largely depend on how long the property has been vacant. The longer the landlord has been without a tenant, the more likely you are to get the terms you want. If the property is rendered unusable, you’ll be able to claim an abatement until the damage has been repaired.
That said, you can also claim a rent abatement if your lease doesn’t call for it. If the landlord does not meet the terms of the lease, including providing a habitable residence, you can take them to court and obtain a judge’s order for an abatement. However, you’ll first need to have your landlord served with official notice that repairs are needed, give them a specified time to make the repairs, and only then file a claim with the court.
How Is Rent Abatement Calculated?
The amount of abatement can be calculated in two ways. First, it can be reduced by the percentage of the property that has been rendered unusable. So if 25 percent of a house is rendered unusable by a flood, the rent would be reduced by 25 percent.
The other way is to calculate the amount by which the property’s fair market value has been reduced. So if an apartment rents for $1,200 per month, but is currently only worth $800 per month, the rent would be reduced to $800.
Benefits Of Rent Abatement For Landlord & Tenants
From the landlord’s perspective, offering a rent abatement helps to attract more potential tenants. They’ll also attract more particular candidates, who are more likely to adhere to the lease terms themselves.
For tenants, you’re protected from having to pay rental costs for a property you can’t even use. This can save you legal trouble down the road. Without abatement terms in your lease, you’ll have to work out any abatements directly with your landlord – or go through the trouble and expense of taking them to court.
What Landlords Need To Know About Rent Abatement
For landlords, the biggest benefit of offering a rent abatement is attracting more tenants. Even if you’re not collecting rent for a few months, you don’t have a vacancy, either. And if the tenant requests an abatement to improve the property, you ultimately benefit by the increased property value.
That said, keep in mind that a rent abatement also exposes you to potential liabilities. If there’s a fire or natural disaster, you won’t be able to collect rent on the property until the damage has been repaired.
On the other hand, a tenant who can’t use their space is eventually going to take you to court anyway, costing you money and – more importantly – damaging your reputation. In other words, smart and ethical landlords will offer an abatement on their own when one is warranted, whether or not it’s spelled out in the lease. Since you’d offer good-faith abatements anyway, writing specific terms into the lease can only serve to protect you from unreasonable tenants.
Insurance Options To Protect Tenants
Rent abatement is a valuable source of relief if you’re unable to use your rental property. That said, you’ve probably faced extra costs as a result of whatever caused the property damage in the first place. For instance, you may have had a fire in your apartment building. Your apartment didn’t actually catch fire, but the smoke ruined all your upholstery and the sprinkler system destroyed all your electronics. In that case, the abatement would relieve you from your rent payments, but you’d still have to replace your furniture and electronics.
Thankfully, there are ways to cover these expenses without breaking the bank. The three main options are:
Business Liability Insurance
Business Interruption Insurance
Let’s take a closer look at each.
Renter’s insurance covers damage caused to a tenant’s personal belongings. It protects you from losses caused by the following causes:
Lightning or hail
Other extreme weather
In addition to covering the cost of personal belongings, renter’s insurance can also cover the cost of temporary housing. If you’re unable to qualify for rent abatement, it can serve as an essential stopgap.
Business Liability Insurance
Business liability insurance covers damage caused to business-owned property. It generally covers damage caused by:
High winds and other extreme weather
If your business has a lot of assets, including physical inventory, business liability insurance will ensure that you’re not going to suffer a total loss.
Business Interruption Insurance
Business interruption insurance provides crucial cash flow in the event that property damage forces your business to suspend operations.
For a larger business with multiple facilities, it can cover the cost of the loss of a particular facility. For example, let’s say you run a chain of five restaurants, and each restaurant produces 20% of your revenue. One restaurant is severely damaged when a freight train derails and collapses half the building. In that case, you’d be compensated for 20% of your revenue until the restaurant is restored to operation.
Can You Take A Rent Abatement Case To Court?
Yes. Most cities and localities have a housing department that has strict requirements for landlords, and many will have similar inspection requirements for commercial properties. You’ll have to call your local housing department or the equivalent and find out what your options are. If the property is not up to standard, you may be able to take your landlord to court and get an order for an abatement.
How To Negotiate Rent Abatement
What kind of abatement terms you can negotiate will depend largely on how long the property has been vacant and the state of the market at large. That said, there are a couple of tried and true ways to negotiate favorable terms.
Completing Property Improvements
In most cases, a landlord will be willing to agree to an abatement in advance if a tenant agrees to improve the property. This can represent an upfront expense for the tenant, so an abatement is certainly justified. For the landlord, it ultimately means an increase in property value.
Down Economy Negotiation
A down economy negotiation is more often used for a deferral than for an outright abatement. The tenant asks for an initial abatement because they have startup costs or other financial hardships. In return, the future rental rates are increased to compensate.
Rent abatement terms are put into leases in order to protect both landlords and tenants. By outlining abatement terms in advance, both parties know exactly what they’re doing when they sign. For landlords, this also brings the benefit of attracting more and higher-quality tenants. And for tenants, it means knowing you won’t have to pay rent for a property you can’t use.
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