by Michael A. Mann
Written by Michael A. Mann, this article explains the different types of leases available in the realm of commercial tenancies.
Are you planning on renting space for your business? Are you thinking of leasing a house or apartment to live in? If so, be cautious of the form of lease agreement that you enter into with the property owner. In the commercial leasing world, there are generally two types of leases – a “gross” lease and a “net” lease. There are minor variations in residential leases. The purpose of this article is to highlight a few of the advantages and disadvantages of the different formats.
“Gross Leases”
When a tenant enters into a gross lease (sometimes called a “Fully Serviced Lease”), the tenant pays a fixed amount of rent to the landlord and the landlord is responsible for all other expenses relating to the property (which generally can include utilities, maintenance, janitorial, security, etc.). In certain variations of this lease, the tenant may be responsible for some of the property taxes and insurance costs relating to the building; but in almost all cases the tenant will have to pay for its own consumption of utilities.
“Triple Net Leases”
By contrast, a triple net lease requires the tenant to pay a base (or “minimum”) rent plus a share of the landlord’s overall expenses for maintaining and insuring the property. This base rent plus additional rent is usually due on a monthly basis. In all such situations, the tenant must pay for its own utilities.
The Risk Factor
Whether the parties enter into a net lease or a gross lease depends upon who is willing to bear the risk. With a gross lease, the landlord takes the chance that the rental amount he/she has set will cover all of out-of-pocket expenses. This is why rent per square foot in gross leases is higher than market rents for similar premises which have triple net leases; however, from the tenant’s perspective, it allows the tenant to budget for more consistent rent payments over the term of the lease.
A triple net lease shifts the risk to the tenant. In this case, the tenant bears the uncertainty of the additional rent costs that are payable depending upon the landlord’s reasonable expenditures. At the beginning of each lease year, the landlord usually estimates monthly operating expenses and then an appropriate adjustment is made at year end for actual expenses incurred.
The Residential Context
The tenant of a residential unit generally can take comfort in the Tenant Protection Act which governs residential leases because, unlike a commercial tenant who operates its business from the premises, the residential tenant is protected from dramatic increases in rents on a year-to-year basis. There are also health, safety and housing maintenance standards that the landlord must abide by in the legislation and generally without any increases to rent being charged.
“Common Ground”
As you might expect, landlords usually have the greater bargaining power and they tend to choose net leases. Therefore, as a prospective tenant, you need to be cautious about the definition of such terms as “common areas”, “operating costs” and the tenant’s “proportionate share” of such costs. You would be well-advised to seek legal counsel to review a proposed lease in connection with your individual circumstances.