What types of Commercial Leases are there?
The types of commercial leases fall on a spectrum due to the flexibility of terms in the lease agreements. However, there are some characteristics, based on two different types of rent payment methods gross or net, which help categorize the types of leases.
Simply put, in a gross lease (sometimes referred to as a full-service lease), the tenant pays a higher price point for an all-inclusive rent. This means the landlord is responsible for paying most of the costs associated with the operation of the property such as maintenance, insurance, and property taxes.
Of course, some of these expenses depend on the arrangement between the tenant and the landlord. For instance, you might include janitorial services in the rent but limit those services by frequency or type. If a tenant requires daily rather than weekly cleaning, or special services like floor waxing, then you’ll have to discuss a change in the rent price or make them responsible for covering the costs.
In this kind of Commercial Lease Agreement, the tenant’s responsibility extends to paying rent and growing their business, while the landlord retains total responsibility of paying for and maintaining the building.
Modified Gross Lease
A modified gross lease tends to balance responsibilities between the landlord and tenant and is more common in multi-tenant buildings. In this type of arrangement, the tenant pays a lump sum for rent and then various costs directly related to their specific unit, including maintenance, repairs, and utilities, while the landlord pays for other operating costs like common area maintenance, landscaping, and lot care (as well as insurance and property taxes in many cases).
Units in office buildings often operate under this type of lease because it tends to be more fair for all tenants.
For instance, in a building that only has one electric or natural gas meter, the heating bill would be evenly split between all tenants, or they would each pay a proportional share of the bill based on their unit’s square footage.
In a net lease, tenants agree to a lower rent payment while assuming responsibility for some or all of the other 'usual' expenses such as utilities, janitorial services, taxes, property insurance, and so on.
The three nets in net leases refer to property tax, property insurance, and property maintenance. These additional expenses can differ from agreement to agreement, and which expenses a tenant takes on depends on the kind of net lease being made.
There are three types of net leases:
- Single Net Lease (N Lease)
- Double Net Lease (NN Lease)
- Triple Net Lease (NNN Lease)
Each type of net lease differs slightly in how 'usual costs' are divided between landlord and tenant. With the flexibility of commercial leases, the terms of who pays what can be unique to every agreement, regardless of the parties’ intent to create a specific type of net lease.
Single Net Lease (N Lease)
In a single net lease, the tenant pays rent plus the costs of one net: property tax. In this case, the tenant pays a portion of the building’s property tax based on the proportion of square footage being leased. The landlord typically covers all other building expenses while the tenant pays for utilities and janitorial services.
Double Net Lease (NN Lease)
A double net lease typically requires the tenant to pay base rent and a proportional share of building property tax (like in the single net lease), in addition to property insurance (the second net). The landlord covers structural repairs and maintenance for common areas like building lobbies and bathrooms. The tenant is also usually responsible for covering utility and extra janitorial expenses.
Triple Net Lease (NNN Lease)
This type of net lease places most of the responsibilities on the tenant rather than the landlord. In addition to base rent, the tenant is also responsible for some or all real estate ownership costs. These costs comprise all three nets, i.e. property insurance, property taxes, and property maintenance. The tenant also typically pays for utilities, maintenance, repairs, and operation costs.
In this arrangement, the landlord’s obligation is to provide space and charge the tenant to conduct business out of that space. Virtually every other cost is left to the tenant to sort out.