Recapture of Abated Rent If Tenant Defaults
Recapture of Abated Rent If Tenant Defaults
In today’s market, it is common for landlords to give fully or partially abated rent as a lease concession to tenants. Occasionally the abated rent is staggered throughout the term (e.g., one month’s rent is abated every year), but more often the abated rent is front-loaded at the beginning of the term. Abated rent is factored into the overall economics of a lease deal, based on the tenant’s payment of rent during the entire length of the term. Landlords should make sure that the lease allows the landlord to recapture the abated rent in the event of a tenant default.
A common mistake that landlords make with respect to abated rent is to state that the rent during the abated rent period is $0, “free” or “abated.” Instead, the lease should provide for a rent amount but state that the rent is abated if tenant fully and faithfully performs for the entire term of the lease. If the tenant defaults, then the landlord can recapture the abated rent in its damages. Following is a sample provision for this concept:
Base Rent for the period commencing on [date] and ending on [date] shall be fully abated (the “Abated Rent”) and only payable by Tenant in the event of a default by Tenant. Tenant shall be credited with having paid all of the Abated Rent on the expiration of the Term only if the Tenant has fully, faithfully and punctually performed all of Tenant’s obligations under the Lease during the Term. If Tenant defaults and does not cure within the applicable grace period during the Term, the Abated Rent shall immediately become due and payable in full and this Lease shall be enforced as if there were no such rent abatement or rent concession.
Tenants should be careful to negotiate these provisions as well. First, the tenant should require that the landlord may only recapture the abated rent if the landlord terminates the lease due to a tenant default. The “full and faithful performance” language is ambiguous and a late payment of rent for 1 day (or similar minor breach) could be interpreted as a trigger event. It would be unfair for the landlord to claim that the abated rent is due unless the breach is material and the tenant has an opportunity to cure and fails to do so. Second, the tenant should negotiate that the landlord’s ability to recapture the abated rent is reduced over time, since the landlord is receiving the benefit of the lease over time. For example, if the lease has a 10 year term and tenant performs for 7 years before breaching, the tenant could negotiate that the landlord received 70% of the intended benefit of the lease and should only recapture 30% of the abated rent. This is a business issue for the landlord and tenant to negotiate.
Prior to using any language or concepts from this blog entry, consult with an attorney.
Ryan Rosensteel is a real estate and construction attorney licensed in Arizona. You can contact him at rrosensteel@rrlawaz.com.