One of my favorite sayings related to calculating a business interruption loss is:
All variable expenses are saved, but not all saved expenses are variable.
This quote can often be applied to rent related to office or production space. Before a business interruption loss occurs, managers should review commercial leases and look for an “abatement” clause within the lease. In general, an abatement clause relieves the renter of payment obligations during the period that the building cannot be used for its intended purpose. If there is an abatement clause, rent will most likely be considered as a saved expense in a business interruption calculation.
It’s important to understand if an abatement clause is in a rental or lease agreement at the time a rental/lease agreement is executed. For example, if management is unaware of the abatement clause, the business may inadvertently continue to make rent/lease payments that could be difficult to recover. For many businesses, the time period following a loss is one where every dollar must be utilized in the correct way, because businesses are especially vulnerable to cash flow fluctuations following a loss.
Before a loss occurs, review leases for abatement clauses and write instructions for rent payments, depending on the lease wording, in the business continuity plan so there are as few mistakes as possible in that hectic time following a disaster.
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