Types of Commercial Leases
What business owners should know about renting real estate
By S.M. Oliva | Reviewed by Canaan Suitt, J.D. | Last updated on April 24, 2022Use these links to jump to different sections:
- 1. Gross Leases
- 2. Net Leases
- 3. Percentage and Cost-of-Living Leases
- Get Legal Help for Your Commercial Real Estate Transactions
Signing a commercial lease is not the same thing as renting an apartment. Residential leases tend to follow certain boilerplate language and are subject to tenant’s rights and a host of state and local consumer protection laws. Commercial leases, on the other hand, are generally left to the parties to negotiate as they see fit. This enables landlords and tenants to customize commercial lease agreements for their needs.
Consequently, a commercial real estate lease may take many different forms. One way to classify such leases is by the terms of the rent–that is, they are either “gross” or “net” leases.
1. Gross Leases
With a gross lease, the tenant pays the landlord a monthly flat, fixed rent payment. This payment covers the landlord’s operating costs, including maintenance, property taxes, and insurance. Gross leases may also include tenant utilities, such as heat, air conditioning, electric, water, and janitorial services for the commercial property.
A gross lease may be all-inclusive with respect to utilities, or the landlord may establish a cap beyond which the tenant may be charged for any excess use. The tenant needs to clarify such terms before signing the lease, especially if they expect to operate a business that requires a high level of electricity or other services.
A commercial landlord may also ask for an escalation clause, which basically allows it to increase the amount of rent each year to offset any increase in overall building expenses and real estate taxes. In some cases, the terms of the lease may provide for a fixed increase in the rent each year, which is sometimes called a step lease or modified gross lease.
2. Net Leases
Unlike a gross lease, a net lease typically offers a lower monthly base rent. However, additional building expenses are not included in the monthly rent. In other words, the landlord can charge the tenants separately for maintenance and operational costs. But, in contrast to a gross lease, a net lease usually charges actual expenses rather than relying on estimates for operating expenses.
There are also multiple subcategories of net leases. For example, in a single net lease, the tenant only pays the base rent plus a prorated share of the commercial space’s overall property tax, while the landlord covers any other expenses. There are also double net (NN) and triple net leases (NNN), where the commercial tenant assumes responsibility for additional expenses. Indeed, many retail commercial leases are considered triple-net, which means the tenant must pay separate charges for property taxes, insurance, and maintenance of common areas on top of the base rent.
3. Percentage and Cost-of-Living Leases
In some cases, landlords and tenants may also utilize what is known as a percentage lease. This is where the tenant agrees to pay a percentage of its gross sales to the landlord on top of the base rent. There are also leases where the rent itself is tied to the cost of living in the area—that is, where the rent increases based on inflation.
Get Legal Help for Your Commercial Real Estate Transactions
As you can see, there is no one-size-fits-all approach to commercial leases. A qualified real estate attorney can advise you on your legal issues and determine which lease type best meets your needs. For more information on this area, check out our overview of real estate laws.
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Enter your location below to get connected with a qualified attorney today.Additional Commercial Real Estate Transactions articles
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- What Is Tax Increment Financing for Real Estate Projects?
- Do I Need a Commerical Real Estate Attorney for Business Relocation?
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