The Types of Commercial Leases in Massachusetts
What business owners should know about renting real estate
on August 9, 2018
Updated on April 24, 2022
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 to their specific needs.
Consequently, there are many different forms a commercial real estate lease may take. One way to classify such leases is by the terms of the rent–that is to say, they are either “gross” or “net” leases.
With a gross lease, the tenant pays the landlord a flat, fixed amount each month. This payment covers all of 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. Obviously, it is important for the tenant 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 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.
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 building’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.
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—i.e., where the rent increases based on inflation.
As you can see, there is no one-size-fits-all approach to commercial leases. A qualified Massachusetts real estate attorney can advise you on which lease type best meets your needs. For more information on this area, check out our overview of real estate laws.