Almost all commercial property renters have had occasion to talk to their landlords over the course of the COVID-19 pandemic.  Many renters short on rent and in default. Many renters and landlords are now seeking rent abatement as part of the solution to the rent problem.

While many landlords are extending abatement, not all are. Many renters are learning that they do not have any right to abatement. Compounding the problem, many landlords do not understand how abating rent during this pandemic benefits them.

Rent abatement is what is known as “free rent” or “rent forgiveness.”  The word abatement means “a reduction in the full amount of a tax,” or as it applies in this context, a reduction in the amount of rent owed (for a period of time).  Understanding abatement and that it is properly applied to renters during this pandemic is a key concept for landlords to understand while negotiating workable solutions to the current rent dilemma.

Abating rent during this pandemic can mean the difference between keeping a thriving portfolio of commercial clients and not.

Rent abatement is often given by landlords at the beginning of a lease term as an inducement for the renter to enter a long-term commercial lease.  The common industry practice in Hawaii is to reduce or eliminate the first two or three months of rent.  With the time the tenant’s business can move in and get up and running well without the immediate pressure of rent.  Landlords sometimes give abatement to defray tenant moving expenses or to allow for a tenant to complete construction.  Landlords like extending abatement at the beginning of a lease because it is a cost that the landlord can plan for and is likely to have already included in their cost projections.

Most often abatement comes to those who ask for it sometime during lease negotiations.

While abatement is often a sign of a fair and balanced commercial lease, it is also an implicit acknowledgment by the landlord that the health of her business is tied to the success of the commercial renter. A landlord cannot make money without paying tenants and a tenant who has a failing business is not likely to remain current on their rent payments or pay back any rent deficiency. Many landlords now, in the face of the pandemic, are facing the situation where their tenants’ businesses are failing, tenants are not paying rent or requesting abatement, all while the costs of operating continue to climb.

The edicts of the government and social distancing alone have cut into the bottom line in addition to the general loss of business.  Landlords finding themselves in this situation will have to take a critical look at whether forcing tenants to remain in their leases to keep occupancy high is truly in the landlord’s best interests.

In the future the landlord may be facing a situation where many of its tenants are in default and it is forced to shoulder a great percentage of the total common area management bill to keep whatever rents there may be flowing in. To avoid that future situation, a landlord would do well to determine how much abatement it can mete out while meeting its own obligations to its lenders and extend abatement to tenants wisely and discretely. Under almost any circumstance, it is in the landlord’s best interest to have renters succeed and fulfill the term of their lease.

Landlords who wield a heavy hand now may later find themselves without paying tenants later.

Landlords may meet the rent problem in a number of ways. One way is to force tenants to remain in place and adhere to the terms of their leases without extending any abatement.  This approach works only if the landlord is sure the tenant can face the financial burden. The tenant must have the independent resources necessary to weather the pandemic.  Old institutions and governmental agencies are more likely, as tenants, to be able to shoulder the burden of loss due to the pandemic than private companies and start-ups.

Many commercial tenants cannot shoulder the burden of loss alone, especially if the tenant’s business is: (1) unestablished (under five years old), or (2) hit especially hard by the pandemic (e.g., tourism attractions and “non-essential” businesses) or (3) because of the nature of the tenant’s business, the tenant operates hand to mouth or divvies up its profits regularly (e.g., hair salons, partnerships).

Landlords should consider each tenant’s circumstances individually, as well as how that tenant’s circumstances fit into the landlord’s general plan to make it beyond the pandemic.

If the tenant is giving an indication that they are going to fail without help, the landlord should take heed and realize that in sharing some of the loss with the tenant, the tenant will survive. In turn, the landlord should realize planned-for projected profits. Thoroughness would dictate that the landlord require a tenant to show proof of their circumstances before extending abatement.

A key concept for landlords to understand is that they can plan for a loss in profits better than their tenants. Tenants are subject to the immediate fluctuations of the Covidian market. Landlords are buffered from the market by tenants.  It is wise for landlords, therefore, to go with a plan that shores up the tenant from the immediate fluctuations of the market. The idea is to provide for tenants to continue paying rent.  In most situations, it is folly for a landlord to fail to hedge pandemic-losses with its tenants. Favoring sure, short-term returns over the long-term financial health of its tenants is a recipe for disaster. A landlord who seeks a rent deficiency from a guarantor of a commercial lease may likely find that they already poured their assets into the business to keep it afloat during the pandemic.

This pandemic is going to continue and to continue to stay alive, landlords and tenants will go it together.

A great way to ensure that a landlord’s business can survive the pandemic is to extend help to its tenants in the form of abatement or a reduction in rent.

If you did not obtain any abatement at the inception of your lease and you are now facing unpaid rent bills because of the pandemic, you would do well to point that out to your landlord.  Point out what a good tenant you have been and that you have paid all your bills on time.  Point out whether you bring in more business to the area than other businesses do. Show the landlord your value as a tenant.

A landlord may ask a tenant to provide financial statements showing loss profits.  A landlord may ask in exchange for abatement the extension of the lease term by the same period of abatement so that the landlord gets the full amount of rent they were planning on.  Landlords, however, should consider well whether extending the lease of a tenant’s dead business will make them any more money at all.

In this pandemic, landlords and tenants who work together survive.

From a landlord’s perspective, abatement is like an unoccupied space.  If no one moves into a space, the landlord is already going it without rental income.  Knowing they will make money on your rent payments later, giving a rent abatement to you for several months is usually something landlords are willing to do.

From a landlord’s perspective, abatement is also the lesser of evils.  Landlords are more open to abatement than they are to other costly concessions like paying for tenant improvements.  For example, when the landlord and tenant cannot reach an agreement regarding tenant improvement allowances, a landlord may request abatement as an alternate to the landlord paying an allowance.

Abatement may also come with strings attached, so read your lease carefully.  If your lease provides abatement when you are unable to occupy your space, it likely has a clause that voids abatement when the reason you cannot occupy your space is your doing.  In cases like this, the landlord is likely to try to blame the problem on the tenant and its employees, e.g., blaming pest problems on the tenant not keeping the space clean.  The clause might also say that if repairs take longer than a certain period, your landlord may terminate the lease rather than abate rent.

Much of the time, landlords require tenants to repay at the end of the lease the rent that would have been paid during the abatement period at a higher rate.  It is critical to understand these things before you sign a lease, which is why you ought to have a licensed attorney look at the lease and assist you in negotiating favorable or fair terms.

Negotiations offer rich opportunities to arrive at workable solutions for all.

In terms of this pandemic, it is a good idea for both landlords and tenants to get rent abatement written into a lease.  If you know what the custom and practice are, where the market is during these uncertain times, and are a good negotiator, what you get in abatement might be more valuable than what you give up to get it.  Remember, landlords, what you give up in abatement can be made-up in other ways.  For instance, agreeing with tenants to have higher CAM fees or escalating yearly rent minimums.

With that said, negotiating with legal counsel at your side is the best way to get as much value as possible out of lease negotiations during this pandemic. Above all landlords and tenants should work together to shoulder loss during this pandemic so that many more businesses survive.