A commercial lease is similar to a residential lease in that it is a contract where the lessee (tenant) pays the lessor (property owner or landlord) for use of the lessor’s property. But commercial leases are different from residential leases primarily because the lessee intends to use the property for business, rather than living purposes.
As a result of the unique business needs of commercial tenants and property owners, a variety of different types of commercial leases have developed over the years. A few of the major types are described below.
The Net Lease
With a net lease, the commercial tenant pays a base rent plus a pro-rata share of expenses, such as insurance, taxes and/or maintenance. Because there are a number of expenses that are possible, four types of net leases exist:
1. Single net: The tenant pays base rent plus a pro-rata share of property taxes.
2. Double net: The tenant pays base rent plus a pro-rata share of property taxes and insurance.
3. Triple net: The tenant pays base rent plus a pro-rata share of property taxes, insurance and maintenance costs.
4. Absolute net: The tenant pays base rent plus any other cost to use the property. In an absolute net commercial lease, the tenant is therefore responsible for anything that happens to the property, just like a property owner would be. The absolute net lease isn’t very common because most tenants would be better off simply buying the property themselves.
The Gross Lease
The gross lease (sometimes called a full service lease) is straightforward in that the tenant makes one simple rent payment that stays constant for the term of the lease. However, this payment includes the base rent plus a predetermined amount for the taxes, maintenance, insurance and any other applicable expenses.
One of the disadvantages of the gross lease is that any unexpected rises in expenses can end up hurting the landlord. To combat this, landlords often build in a buffer to account for any potentially higher than expected expenses. But this means tenants often pay more for a gross lease than they would for a net lease.
The Percentage Lease
Under a percentage lease, the tenant makes a payment that consists not just of base rent and expenses, but a percentage of the tenant’s sales. The percentage lease is most common for retail commercial tenants and can be advantageous for the tenant in that they usually pay a lower base rent. This is especially helpful when business is slow. But when business is good, the landlord receives a larger rent payment from the tenant, providing an advantage for the landlord.
Other Commercial Lease Variations
There is the modified gross lease (also known as a modified net lease), which is a hybrid between a net lease and a gross lease. With a modified gross lease, the tenant pays a constant amount each time period, as is the case with a gross lease.
But like a net lease, the types of expenses the tenant is responsible for (like maintenance, taxes and insurance) is variable and subject to negotiation between the landlord and tenant. Depending on how good the commercial landlord-tenant relationship is, the modified gross can be a great compromise for all parties involved.
For More Information
To find out more about commercial leases or for help handling commercial lease disputes such as breach of contract, contact one of our commercial lease lawyers at the Thomas Law Office.