Commercial lease is an essential part of clearly defining the boundaries between tenant and owner.
There are three main types of commercial leases, but all are based around two ways rent is calculated. Regardless of the type of lease, all commercial leases start with a base rent, which is a minimum amount paid by the tenant that does not include any additional expenses or operating costs. It is a fixed rent which does not change from month-to-month.
A percentage lease is most common in malls or shopping centers. In a percentage lease, the tenant pays a percentage of the gross profits to the owner, in addition to the base rent.
Gross Rent Leases
A gross lease is used with various types of commercial properties, including single and multi-owner properties, industrial, and some retail properties. The tenant pays a base rent while the owner pays all operating and maintenance expenses. However, if the expenses exceed those typical for the building, the tenant can be charged for the difference.
Insurance and taxes may be paid by the tenant or the owner, depending on the terms of the contract. In addition, some leases also include a fixed rent increase at a specified time in the future in order to keep up with market rates.
Net leases allow tenants to pay a lower base rent in exchange for paying a portion of the operation and maintenance expenses of the property. There are three types of net leases.
- Single Net Lease (N Lease)
In a single net lease, also called a modified gross lease, the tenant pays base rent as well as utilities and taxes. The owner pays maintenance and repair expenses, and any taxes not paid by the tenant.
- Double Net Lease (NN Lease)
In a double net lease, the tenant pays utilities, taxes, maintenance and repairs, and insurance premiums. The owner only pays for repairs of major items like the roof or the repair of the building’s structure.
- Triple Net Lease (NNN Lease)
The triple net lease requires the tenant to pay for nearly all costs associated with the property, including maintenance and repairs. Occasionally the owner will require a bonded net lease, which prevents the tenant from ending the lease prematurely for any reason; this is usually done to ensure the tenant does not break the lease if the expenses are higher than expected.
What is the difference between fixed leases and month-to-month commercial leases?
Fixed leases provide more security for both the owner and the tenant. These types of leases end on a specific date noted in the lease. A similar type of lease ends based on a particular number of weeks, months, or years as stated in the lease. In both cases, the tenant does not need to give notice when the lease ends, as termination is automatic.
Another type of lease is termed a periodic tenancy. It may be weekly, monthly or yearly, but unlike fixed term leases, it renews automatically. This is the tenant or owner would like to end the lease, they need to give notice beforehand.
This type of lease is less favorable towards tenants, as rent or other changes in the lease can be implemented in the middle of the lease term, as long as the owner gives proper notice beforehand. On the other hand, if you’re a tenant who would like the option of leaving an expensive property if the market changes, this could be a good option.
As a tenant, you need to decide which is more important: flexibility, or security. On the one hand, the flexibility to leave a property with very little notice might be advantageous, but it comes with the risk that the owner can ask you to leave the property or can raise the rent within as little as 7 days.