What Is a Commercial Lease?

A commercial lease is a binding agreement that should be mutually beneficial for the tenant and landlord.

A lease should also be specific to a property and to the parties involved – there is no “standard,” when it comes to commercial leases, and using a vague, non-specific lease can lead to legal headaches for both landlords and tenants.

LitigationIf you’re a commercial landlord or a business owner looking to rent property, a commercial lease lawyer at Lusk Law, LLC can review your lease agreement to make sure it’s legally sound and beneficial for all parties. We can also provide guidance, if you’re attempting to negotiate the terms of your lease. Call us today at 443-535-9715.

Types of Commercial Leases

There are two types of commercial leases: gross and net. Gross leases include all of the property owner’s costs – insurance, property taxes, and maintenance – in the monthly rent payment. Net leases require the tenants to pay for some or all of those costs. Many commercial leases are hybrid documents that include aspects of both gross and net leases.

Here’s a closer look at the types of commercial leases:

Gross lease. A gross lease establishes a fixed rent amount every month. This type of lease is common in buildings that house multiple tenants. The rent tenants pay covers property taxes, maintenance, and the landlord’s property insurance costs.

Percentage lease. With a percentage lease, tenants pay a base rent each month, along with a fixed percentage of their monthly sales. This arrangement is beneficial for businesses whose income varies considerably during a year, because the base rent is usually lower than what they’d pay with a standard gross lease. Retail shops, for example, pay less rent in slower months than they do during holiday shopping season.

Net lease. There are three types of net lease – single, double, and triple.

  • A single net lease requires tenants to pay property taxes, in addition to rent. The landlord pays for other operating expenses, including maintenance and repairs.
  • A double net lease requires tenants to pay rent, property taxes, and insurance premiums. In multiple-tenant buildings, the landlord may assign those costs proportionately to each tenant. The landlord pays for structural maintenance.
  • A triple net lease requires tenants to pay property taxes, insurance premiums, and maintenance and repair costs. Utilities may or may not be the responsibility of the tenant. This lease is also called an NNN lease, or an absolute net lease; however, it’s not a true absolute net lease unless the tenant pays all costs of occupying a property, including utilities.

What Is a Modified Net Lease?

If a landlord presents a tenant with a net lease and the tenant wants to avoid paying some of the costs, the tenant can ask for a modified net lease, the terms of which are created through landlord-tenant negotiation. So, for example, in an aging building, a tenant may be reluctant to assume all costs of structural repairs. A modified net lease could specify that the tenant is responsible for structural repairs only up to a certain dollar amount, with the owner paying the costs above that amount.

Risks Associated with Commercial Leases

Tenants should carefully review all clauses within a lease. What are your rights if the landlord sells the building? What are your obligations if you decide to shutter your business before the end of the lease term? Any lease you sign should clearly answer those questions.

When you’re a tenant with a net lease that requires you to pay for maintenance or repairs, make sure you fully understand your obligations. For example, do you pay the landlord’s flood insurance premiums, or does the owner require you to obtain flood insurance for the property you’re renting?

If you’re a landlord and require tenants to carry insurance on your property, you may not know if the tenant stops paying premiums and the insurer cancels the policy, unless the landlord is added as an additional insured on the policy. However, to ensure any potential losses are covered, you may wish to pay the premiums yourself and pass those costs on to the tenant.

Landlords also assume some degree of risk any time they lease to a startup business. If the business struggles to make a profit, or fails, you may have difficulty collecting the rent. You can ask to review the business plan for potential tenants, to help you decide whether you want to lease to them.

Have Questions? Contact An Experienced Commercial Lease Lawyer Today

Leases are lengthy, complex documents, but even one incorrect or omitted word could lead to litigation if a dispute arises. Whether you’re a landlord or a potential tenant, don’t enter into a lease agreement until you have an attorney review it. Call Lusk Law, LLC, today at 443-535-9715, or fill out our online form, to request a consultation with one of our attorneys.

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