Place Limits on When Tenant Abatement Period Will End
Although most leases give tenants the right to a rent abatement when their office or retail space becomes unusable after a fire, flood, or similar casualty, they fail to adequately define when the abatement period will end. Merely saying that the abatement period will continue until the space is no longer “unusable” is vague, and gives the tenant ammunition to take advantage of you. Plug this loophole by placing limits in your lease specifying how long the abatement will last.
Keep Tight Rein on Tenant's Right
To keep a tight rein on a tenant's abatement right, it's important to make sure the lease clause sets definitive restrictions on when the abatement will end. In fact, the abatement period should end as soon as the tenant takes possession of—that is, re-enters—the space for any purpose. To do this, say that the abatement will last from the date of the casualty until the earlier of the following two events:
Date tenant takes possession of unusable part. This is the date the tenant, or its subtenant or any other occupant in the space, takes possession of any part of the unusable space for any purpose. The tenant may argue that the abatement should end only if it's using the space for its previous purpose. If you agree to this change, you may run into a problem in which you and the tenant dispute whether or not the tenant is using the space the way it was previously used. Also, the tenant may want the right to occupy the space temporarily in the event of an emergency without losing its abatement. If you agree to this, spell out in the lease what it means (that is, what situation constitutes an “emergency”).
Date restoration work is substantially complete. This is the date that the work that's needed to restore the unusable part of the space to a usable condition is substantially complete—that is, the space (or a portion of it) can again be used the way it was before the casualty—and no major work remains to be done. This date is called the “substantial completion date” in the lease.
Reduce Abatement in Proportion to Space Restored
The tenant's store or office space may be made up of several floors or several rooms. If you restore a floor or a room so that it is usable, don't get stuck giving the tenant the full abatement until the entire space is restored. Instead, have the right to reduce the abatement when the restoration work on part of the unusable space—say one entire floor or one room of the space—is substantially complete. Then the abatement can be reduced in proportion to the amount of the space restored.
The tenant may balk at this provision, arguing that it needs the entire space—or more than one room or floor to run its business. Depending on the tenant, its operation, and the layout of the space, you may have to compromise.
Tenant Resumes Paying Full Rent
Once the abatement period has ended, the tenant must pay the full rent for the space. If only a portion of the space has been restored or reoccupied by the tenant, the tenant must now pay the rent on that portion of the space. And make sure you have the sole and absolute discretion to decide whether the restoration work is substantially complete in all or part of the unusable space, as well as whether the tenant has taken possession of the space.
The tenant may want you to be reasonable in your decision. And it may demand a right in the lease to dispute your decision—possibly through arbitration. Both of these points are fair. But if you go along with them, it's a good idea to require the tenant to pay the increased rent while the dispute is being resolved.