Commercial Leases: “No right of offset,” what does that mean?

For both landlords and tenants, there is curious and confusing phraseology in many if not most commercial leases relative to the payment of rent:

Rent will be paid without any set-off, counterclaim, deduction or recoupment whatsoever.

That sounds like (and is) a lot of legalese, but what does that mean?

It is, in fact, an important provision of commercial leases.  What it means is simply that rent is due from the tenant without delay or reduction based upon claimed breaches of the lease by landlord.  Thus, if the tenant thinks he has defenses to the payment of rent, or claims against the landlord, he must bring them in a separate court action and not use the tactic of offsetting rent — and delaying an eviction — based upon meritorious or frivolous claims of landlord breach.

The provision is not unnecessarily unfair to one side or the other.  Rather, it is a business term for negotiation between the parties.

From a landlord’s perspective, he is surrendering possession of the Premises to tenant and tenant should, month in and month out, pay him for that possession.  If the tenant is “starving” the landlord of rent, while the landlord has to pay his mortgage, taxes, maintenance and insurance, it is a painful and stacked deck against the landlord.  Further, while each month the tenant is getting the benefit of the bargain by occupying the premises, the tenant may prove uncollectible after months or years of litigation.  Further, landlord does not want to find himself in the position of pursuing rent — all the way through a trial — if the defenses of the tenant are entirely fictitious and manufactured just to buy time against an eviction for a rent default.

From the tenant’s perspective, if the landlord has made his building unoccupiable by severely burdensome practices — noise, dust, odors, lack of access or parking, non-operational elevators, bugs, vagrants, etc. — then why should he tender payment every month only to have to litigate in a separate forum to get some or all of that money back?  Further, a landlord can similarly bleed a tenant dry by extracting rent during the tenancy while failing to maintain his building.  And a landlord may prove judgment-proof as well at the end of litigation.

As a result of the weighing of the interests of the landlord and the tenant, there could be compromise language to sometimes standard form lease “no offset” language — for extreme circumstances that “put a tenant out of business.”  But prying that door open even slightly to give the tenant an “argument” against eviction could lead to months or years of costly litigation against a tenant who otherwise would be paying rent monthly.

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Our firm practices extensively in the area of commercial lease drafting and litigation to enforce the same in Ohio and Kentucky.  We invite you to use our professionals to assist you with your investment properties.  Isaac Heintz leads our practice as it relates to commercial lease drafting and Brad Gibson heads our litigation group for its enforcement or defense.

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