The decision to abate rent or defer rent is a business decision many landlords are currently faced with. However, a landlord should be careful when discussing the options with any tenant as the concepts are different in nature.
The abatement of rent typically refers to rent that’s not payable during a certain period of time or required to be repaid by the tenant. Notwithstanding the foregoing, a landlord may expressly include a remedy provision of a lease (or an amendment) language that expressly allows the landlord to seek the value of the abated rent if there is an event of default by the tenant.
Deferment of rent typically refers to a delayed rent for a certain period of time, to be paid by the tenant at a later date. The time frame for when repayment of the deferred rent is a business decision that varies on a case by case basis. For example, tenants with 1 year of lease term should be negotiated differently than tenants with 10 years of lease term remaining. Depending on the goals of the tenant and landlord, each are useful options.
In some unique cases, like those fitness tenants are experiencing, it’s too early to make a final decision on what to offer and how to amend the lease. However, it’s never too early to start planning. In considering whether to abate rent or defer rent, a landlord may consider a number of additional factors:
- Requiring the tenant to continue to pay its share of monthly operating expenses during any abatement period or deferment period. If the premises is a single-tenant location and the tenant is permitted to pay taxes and insurance annually when invoiced, the landlord may want to consider requiring a more traditional escrow of those items if they don’t have confidence that the tenant has been properly escrowing for those items or will be capable of paying those amounts when due. If a tenant pays operating expenses annually when invoiced, the delayed nature of such payments can result in added risk to the landlord.
- Deciding to ask the tenant to extend the term of their lease by the abatement or deferment period, or to exercise a renewal option now;
- If the lease currently does not have a personal guaranty, they may be faced with deciding to ask for a personal guaranty of the deferred rent (or the value of the abated rent). If there is a personal guaranty in place, the guarantor should join in any amendment or agreement to abate or defer rent.
- Evidence that the tenant has applied for PPP or been awarded PPP, or that the tenant has a plan for re-opening (or its continued operations).
- Any agreement with the tenant to abate or defer rent should be documented in an amendment to the lease or letter agreement. Any such amendment to the lease or letter agreement should include a confidentiality provision so that tenants do not start comparing the terms of their agreement with the landlord. A landlord should be careful about general promises like they will “work it out,” “come to an agreement” or “document it later” as such general promises can lead to disputes.
We continue to have lots of conversations with owners/investors, buyers, managers, lenders, and tenants, regarding the above challenges they’re facing as a result of COVID-19. Please feel free to connect with us via email or call us at, (720)989-1031, with any specific tenant lease questions.