There are numerous types of commercial leases available to landlords and tenants. The type of lease used most often depends on the nature of the commercial property, the type of business and the number of tenants leasing in a particular commercial project. San Diego commercial lease lawyer Donald R. Oder takes the time to explain each type of commercial lease to his clients. Whether one is a landlord or a prospective tenant, understanding the types of leases available is important. Landlords seek to maximize profits while simultaneously hoping to attract the best tenants. Prospective tenants in search of a location for their business can better evaluate the pros and cons of available spaces when they better understand the types of leases being presented. A new retail business may find itself choosing between a single unit property on a busy downtown street where the landlord offers a gross lease and a popular shopping mall requiring a triple net lease. All other things being equal (location, visibility, traffic, size, term, options, etc.), the prospective tenant will need to decide which space is the most affordable.
There are two main categories in commercial leasing, the gross lease and the net lease. While the various versions of these categories of leases are often branded differently, the features of the various types of leases are the same. The most common leases are gross leases, modified gross leases and triple net leases.
The Gross Lease: The gross lease is the most tenant friendly lease in that it requires tenants to make a single monthly lease payment with no other expenses. All property expenses are incurred by the landlord including utilities, property taxes, property insurance, maintenance and janitorial expenses. In some versions of the gross lease, landlords will put a cap on the utilities paid by the landlord to shift utility costs back to the tenant where usage is beyond commercially reasonable standards. Either way, paying a single fixed monthly lease payment is ideal for tenants. There is no need to worry about rising property taxes, remodeling expenses or emergency repairs to plumbing and HVAC (heating and air conditioning) systems. While gross leases are most commonly used in office buildings and warehouses, they may be found in any type of commercial property.
The Modified Gross Lease (Base Year Lease)
: With a modified gross lease, the first year of the lease is typically set as the “base year”. The property’s expenses for that base year are paid by the landlord making the first year of the lease the same as a gross lease (i.e. the landlord is assuming the costs of expenses for that year). Moreover, so long as the expenses do not increase above the base year expenses, the landlord will continue to pay the expenses. However, if the property’s expenses increase beyond the base year expenses, the tenant will pay its pro rata share of the difference.
The Triple Net Lease
: With a triple net lease (most commonly used in retail settings), tenants pay all of the property’s expenses (including property taxes, insurance, utilities, plumbing, electrical and HVAC repairs and common area maintenance expenses). For those expenses not unique to a tenant’s premises, a pro rata sum is paid to cover their share of the common expenses. With the triple net lease, landlords pass all costs associated with managing the property on to their tenants with limited exceptions. For instance, Landlords often remain responsible for the structural portions of the property (supporting walls, roofs, etc). In addition to passing on all expenses to their tenants, landlords shift the risk of emergency repairs to their tenants who are in turn required to maintain sufficient insurance coverage.
This is a basic summary of the three main forms of commercial leases used today. Given the complexity of commercial leasing, it is best to consult with an experienced commercial lease attorney in San Diego before venturing out into the market. As one might imagine, it is common for landlords and tenants to negotiate towards slightly different versions of these lease forms sometimes termed modified net leases or single or double net leases. Whatever term is applied, essentially these types of leases fall somewhere in between a fully grossed lease and a pure triple net lease. For instance, a tenant may be responsible for its own utilities and no other expenses, or the tenant may be responsible for its own utilities, insurance and property taxes but no common area expenses. It’s all about shifting obligations and risk. Tenants like gross leases with their fixed rental payments and landlords like triple net leases that pass on as many expenses and as much risk as possible to tenants. Careful consideration should be taken to look for the best possible lease terms available.