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If you’re looking at options to incentivise rental agreements and attract potential future tenants, then learning about rent abatement is a great place to start.
Possessing the right knowledge will help you and your tenants get the most out of your agreement.
How Does A Lease Work?
Before we dive into the details of lease incentives, we’ll need to understand the basics – what is a lease and how does it work?
A lease is an agreement between a landlord and a tenant where the tenant pays a certain amount of money to rent out a space from the landlord. There is usually a Lease Agreement which binds the parties together, detailing the amount of the lease (usually per month) and the length of the lease.
Rental agreements can be renewed after the contract has run its course if both parties are willing.
What Is Rent Abatement?
Rent abatement is an incentive landlords use to gain the interest of potential tenants. It can be used on both residential and commercial leases.
How Does It Work?
Rent abatement comes in multiple forms. However, its main goal is to help tenants save money in the early stages of their agreement, and give landlords the security of a lengthy agreement.
One type of rent abatement is a no pay period. This is common for high value, commercial leases. For the first few months of rent (generally one to three months), the tenant will not owe the landlord rent.
Eventually, the tenant will have their business set up and will start paying rent, usually in large amounts and for long periods of time. The rent-free period allows tenants to gather their bearing and eventually, the landlord profits rent at commercial prices.
Another way to use rent abatement is a decrease in the rent for a long term lease. The longer a tenant agrees to lease the space, there is an agreed upon reduction to the amount of rent charged. This way, the tenant saves money on overall rent and the landlord is guaranteed the security of having a tenant for a long period of time.
Are There Any Other Lease Incentives?
There are multiple lease incentives available that landlords may want to consider when drafting Tenancy Agreements. You may want to consider the following lease incentives:
- Rent free period – this is exactly what it sounds like. A rent-free period is a certain amount of time where the tenant is not obligated to pay rent. Alternatively, it can also be a time where only partial rent is charged.
- A fit-out contribution – this incentive occurs when a tenant adds fixtures on to the property that may be required and later on, the landlord provides reimbursement for the work they have had done to the property.
| Example 1 Michelangelo is renting a store for his new clothing shop. He rents out the perfect space from Raphael, however it’s missing important aspects such as counters and lights. Having a creative eye for design, Michelangelo decides he would rather pick them out himself and have Raphael reimburse him for it upon providing proof of his expenditures. Raphael agrees to this and they put a fit-out clause in their rental agreement. |
Is Rent Abatement The Same As Free Rent?
No, free rent is when no rent is owed to the landlord.
Rent abatement means a tenant will still pay rent regularly. As mentioned, there are multiple types of rent abatement, in cases where rent is foregone for a period of time, a tenant will resume or begin paying rent at a set date.
Abatement does not exempt a tenant from completely paying rent. It lessens the overall amount of rent that is paid either through reduction to the overall amount per month or by having a period in the contract where no rent is owed.
| Example 2 Sunny is renting the third floor of a complex building as his new office space. It’s a prime location in the city with easy access to the building. As Sunny plans on staying there for a long period of time and establishing himself in the community, this space is ideal for him. Sunny starts rental negotiations with his landlord, Mike. Mike would like Sunny as a tenant and offers him an abatement as incentive. According to the offer, if Sunny signs a five-year lease contract with the option for extension at the end of the contract, there will be a 5% reduction of the overall monthly rent. This works out for Sunny as he would like to keep renting the space for as long as possible and it guarantees Mike a tenant for the next 5 years. |
What Are Clawback Clauses?
You might be wondering, “What happens if the tenant decides to terminate their lease anyway?”.
This is understandably worrisome when the biggest benefit of rent abatement is a long-term tenant. However, people change their minds all the time. Let’s say, in the example mentioned above, a new modern building opens up that offers Sunny better views in the same location for a cheaper price. Sunny would likely want to take the new space as his office. Mike is then left with a rental agreement cut short.
This is why clawback clauses are essential for landlords offering rent abatement. A clawback clause gives landlords the right to have the money from the incentive clause repaid if the agreement has been cut short. However, they should be entered into with precaution (it’s good business practice to chat with a lawyer about how you would go about inserting a clawback clause!).
Are They Enforceable?
There is no clear answer to this as it really depends on the circumstances surrounding the agreement. In 148 Brunswick Street Pty Ltd v Strategix Training Group Pty Ltd, an important discussion arose regarding the enforceability of clawback clauses.
In this case, while the clause was present in the contract, the court had to consider other factors and could not simply enforce it simply because it was there. The case is an example that a clawback clause is actually dependent on the context and the circumstances surrounding the rental agreement.
Nevertheless, a clawback clause is a completely legal measure and while its enforceability is dependent on the case, it is definitely worth considering putting into your tenancy agreements.
Key Takeaways
Talking to a lawyer is the best way to ensure your rental agreement works in everyone’s favour and doesn’t end up incurring you a loss. Rent abatement can be a wonderful incentive to inspire tenants to choose your space, however it’s crucial that you are covered by all the clauses in the contract.
Seeking a legal professional that genuinely understands your concerns is key in achieving this. If you would like a consultation on your options going forward, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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