A commercial lease will typically create a number of key obligations and rights for both you the tenant and the landlord. Your solicitors can help you to understand these and how they might impact your situation. A double net lease can make sense if your building has different demands for insurance and taxes from businesses that operate there.
A gross lease, also known as a full service lease, is the type of commercial lease that is typically used in multi-tenant buildings such as retail strip centers and office buildings. The landlord is responsible for paying all the property operating expenses and the tenant pays a flat rent to occupy the space. The landlord is also responsible for paying the property taxes and insurance premiums for the building. A gross lease is typically less expensive for the landlord than a net or triple-net (NNN) lease, which requires tenants to pay their share of the property operating costs, utility bills and taxes.
Landlords like to use gross leases because they give them a consistent, fixed monthly rental income and reduce the risk of tenant defaults. However, it is important for tenants to carefully review the details of a gross lease before signing.
The base year is a key component of a gross lease. It establishes the basis for calculating future increases in operating expenses and allows the landlord to recover some or all of these costs in the tenant’s base rent. This helps offset some of the risks associated with investing in a new building and provides predictable, steady income for the landlord.
A gross lease can provide stability for tenants who are worried about fluctuations in operating costs. For example, if the property’s utility costs are higher in the summer due to air conditioning usage, the landlord will likely pass these increased costs on to the tenant and increase the base rent. While this is not an ideal situation for either party, it is a common practice that can help to alleviate the concerns of both parties.
Another benefit of a gross lease is that it makes budgeting much simpler. The landlord will include all of the property expenses in the flat monthly rental, so there is no guessing what the actual cost will be. This can be beneficial for small business owners who are concerned about overpaying or underpaying.
A gross lease can also be beneficial for landlords who are interested in making energy-efficiency investments in their building. Since they will be able to recoup the expense in the form of increased base rent, it is a way to encourage tenants to save money and energy.
One disadvantage of a gross lease is that it can be difficult to negotiate with a landlord over the exact amount of rent per square foot. It is best to work with a tenant representative who can provide accurate information regarding the cost of different types of properties and negotiate on behalf of the tenant.
It is also important for tenants to understand the differences between a gross lease and a NNN lease, as this can have a significant impact on their bottom line, and it is essential to consult a professional real estate attorney who can provide expert advice on the most effective way to structure a commercial lease. This will ensure that the lease complies with all legal requirements and protects the interests of both parties.