Canada: Rent Abatement In Commercial Leases

EXECUTIVE SUMMARY

The word "abatement" when used in the context of "rent" ranks second among the seven deadly words a landlord does not want to hear in a lease negotiation. The others are "termination", "set-off", "allowance", "reimbursement", "self-help" and "the-landlord-shall". Accordingly, the negotiation of express rights of abatement for tenants in commercial, industrial and retail leases can be a difficult task.

This paper will canvas: five categories of circumstances in which rent abatement is relevant; drafting considerations for abatement clauses; availability of insurance; and the impact of insurance on the negotiation of abatement rights. We also review whether the circumstances give rise to common law or statutory rights of abatement.

This paper is written for lawyers and people engaged in drafting offers to lease and leases for retail, office, specialty and industrial premises in Ontario, Canada.

INTRODUCTION

A recently negotiated lease of retail premises in a large regional shopping centre contained more than 45,000 words. That is about the same number of words as Ray Bradbury's famous book Fahrenheit 451, a classic science fiction book obviously very different from a lease, if only because most leases are something of a mystery.

The following are some simple statistics derived from the above noted sample lease that illustrate the rarity of abatement rights. Leasing professionals will not be surprised to learn that buried in those 45,000 words were only 20 references to variations of the word "abate." Of those 20 references, 18 appeared in the body of the lease and deal with 6 different scenarios.

Our conclusion is that the occurrences of abatement rights in commercial leases are rare even in the case where the landlord and the tenant have relatively equal negotiating power.

WHAT IS RENT ABATEMENT AND WHEN IS IT APPROPRIATE?

Let's put the discussion of abatement in context.

"Abatement" of rent in a lease negotiation means the right or process of reducing the rent in certain circumstances. It is an agreed reduction not requiring the awarding and calculation of damages.

Abatement can be confused with "set-off". Where abatement is a reduction of the agreed rental amount, set-off is where you seek to withhold specified amounts from an otherwise agreed rental amount, for example where the tenant has suffered damages for breach of the lease by the landlord.

Abatement is only one of many remedies. The fact that we discuss abatement as a remedy in the particular circumstances listed below does not mean it is the best remedy or the only remedy. From a tenant's point of view, it is usually best to draft your remedies so that you can claim other remedies as well.

Abatement of rent is a way to reduce rental expense for a period of time in certain circumstances but often the better remedy is a claim for a loss of revenue or profit. Very often the tenant is interested in recovering the lost profits and the right to abate rent is "nice to have". Since the rent paid by the tenant is the landlord's revenue, ensuring the rent continues to be paid is very important from the landlord's perspective.

If the tenant or the landlord has business interruption insurance then there are fewer circumstances requiring abatement of rent. Business interruption insurance insures against the possibility that a loss prevents the business from operating and earning income at its pre-loss level. This can be purchased by the tenant and the landlord for their own interests. A tenant's policy may provide for the payment of rent during a period of interruption, thereby protecting the landlord's interest, however the landlord should still have contingent coverage in the event the tenant's policy does not respond. It may take a while to repair the damage and if that time period is longer than the coverage period under the business interruption insurance then perhaps abatement of rent can be triggered by the expiry of the insurance.

If the risk is insurable then the parties are trying to cover off the exclusions and those elements of the risk which are not insurable. The best way to do that is to be informed as to what type of insurance is available and what exclusions apply. Speak to an insurance broker about these issues.

"Waiver of subrogation" is a common issue in commercial leases. Including a waiver of subrogation or a mutual waiver of subrogation is good for a number of reasons: the recovery from the insurance company is final; there is no delay in the payout by reason of the need to determine fault; and it avoids a subrogated claim. This means that no claim is commenced in the name of the landlord or the tenant, as the case may be, against the other which could involve unpleasant examinations and discoveries involving employees of both parties. An explicit contractual waiver or release included in the lease will bind the insurance companies in many cases.

In some circumstances both the landlord and the tenant arrange insurance. This is because the tenant may not be able to make the ultimate payment notwithstanding they received the payout from the insurance company, or the tenant may go out of business or become bankrupt.1 The tenant will usually argue for a right of abatement and ask the landlord to arrange business interruption insurance. If the tenant is required to arrange business interruption insurance it may not want to contribute to the cost of the landlord's business interruption insurance.

Tenants often complain that regardless of which party carries the insurance the tenant pays for it. The tenant pays directly for its own insurance and the tenant pays for the insurance arranged by the landlord through its contributions to its proportionate share of operating costs. If properly arranged, one policy can be excess coverage to the other policy with the goal that you can overlap coverage but not have to overlap premiums. In some circumstances, both the landlord and the tenant will carry insurance. This is prudent if you are concerned that throughout the term of the lease one or both parties may not maintain the insurance as required under the lease or if there is a chance the coverage limits are not sufficient.

Parties to a lease should assume that there is no natural "right of abatement" or right to reduce the rent. The right to abatement arises from what you negotiate and include in writing in the lease, from statute and possibly the common law (in the case of eviction and the breach of the landlord's covenant of quiet enjoyment).

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