Rent abatement helps create a win-win situation for both parties, as the tenant pays a smaller annual value, whilst the landlord gets a lengthier agreement from the contract. Notwithstanding, the cost of rent abatement alone can only do so much, as the cost of insuring items in the tenant’s home from fire or floods may still exceed the cost reduced from rent. Read on to find out more about what rent abatement means for tenants.
What is a rent abatement?
Rent abatement is an agreement between the landlord and tenant to reduce annual rent by a certain percentage, in a situation where the property has been affected by certain external factors. These external factors can include:
- The decrease in standard of room/unit quality;
- Decrease in various services provided by landlord;
- Fluctuation in rent market prices;
- The partial or full destruction of of property;
- Services, facilities or goods no longer provided;
- The property acquired by government for various reasons; and
- Property can no longer be lawfully used as a resident.
How does it benefit the tenant?
Essentially, the reduced cost of rent from the abatement provides tenants with a much lower annual cost of rent. For instance, if the rent abatement was set at a 20% reduction at a $2000 monthly cost, this would mean that the tenants rent reduces by $400 per month.
Rent abatement also gives tenants an initial breathing space whenever fit-outs are taking place, due to the amount of costs associated with this stage. Being charged rent constantly without a constant flow of income could cost the business, therefore the ‘rent-free’ period is essential. For instance, a shop that leases a new space will likely need this, as this time frame often involves a number of activities such as planning the fit out, delivering equipment in, and getting the business up and running. This period does not allow income for the business, therefore getting rid of rent is helpful for business owners.
How does it benefit the landlord?
Given that tenants receive a reduced amount of income due to the incentive, this may build trust and a relationship that would lead to a long term lease. The cheaper monthly cost issued by the landlord would tend to be more fitting for the tenant, providing security and stability for the landlord as a result of a longer lease period.
There’s often areas in the agreement or negotiations in which they somehow make their money back. The landlord may often find loopholes within the agreement in which he could charge a higher amount or possibly profit off the tenant in various ways. The landlord, if it allows for in the contract, may possibly charge the tenant a higher rent price later in order for him to slightly make back the money lost during the abatement period. He may also possibly benefit from the fact that the tenant might sign a longer lease agreement. In addition to that, he may also start charging the tenant an increased amount, in terms of building expenses.
Are your business agreements in order?
Save your business thousands in legal fees with our Australian Business Agreement Templates drafted by top-tier Australian lawyers.
What other rent incentives can you apply for?
There are also various rent incentives or cutbacks in rent that landlords may draft up. These may include the following:
- Rent-free period : This is when the tenant is obliged for a certain amount of time to not pay rent, however, In some instances, partial rent price is still required.
- Fit-out contribution: Granted by the landlord, this is when tenants do not bear the full cost of space fitting and furnishing. This is often granted towards new tenants.
Is rent-free period the same thing as rent abatement?
In short, no. Rent-free period is an offer made by the landlord to the tenant to live in the property without having to pay rent, for a certain amount of time, so long as the tenant resides in the property. Given its similarity, it highly differs from rent abatement as rent abatement does not completely exempt the tenant from paying rent. Instead, rent abatement only reduces the overall amount owed to the landlord paid monthly, still having to pay regularly.
If you require any assistance with a legal matter as either a landlord or a tenant, our sister Company Legal Kitz can help! They offer FREE 30-minute consultations for any legal assistance you may require. Book here or call at 1300 988 954.