Commercial Tenants: Understanding the Terms of Your Lease

Before you enter into a commercial lease, as a tenant it is important to understand the different types of commercial leases and the obligations required of you under each. Your periodic payments and other obligations could differ drastically depending on the type of lease you sign. Therefore, as you are negotiating the terms, be sure you understand how the particular type of lease you are dealing with works and how it will impact your overall expenses.

  1. Gross Lease (Full Service)
    Under the terms of a full service lease, the rental rate of the property covers the operating expenses owed on the property including property maintenance, utilities, and property taxes. However, the agreement will typically allow the landlord to pass on subsequent increases in such operating expenses to the tenants in the form of an increased rental rate. This type of lease is most often used in the case of office space.
  2. Modified Gross
    A modified gross lease is similar to a full service lease, but it modifies the full service lease to require the tenant to cover some operating expenses in addition to the monthly rental rate. The lease will specify which expenses shall be borne by the tenant.
  3. Triple Net
    A triple net lease is one in which the rental rate does not include operating expenses such as property maintenance, utilities, insurance, and property taxes. Tenants can expect to be billed on a monthly basis for all such expenses over and above the stated rental rate for the space.
  4. Percentage Lease
    Under a percentage lease, the amount the tenant will pay is partly dependent on the amount of revenue earned by the business tenant. Therefore, the tenant will pay the monthly rental rate plus a set percentage of revenue in addition to the base amount.

Although renting commercial space may seem straightforward, distribution of expenses can become confusing, especially where the landlord agrees to cover some expenses and not others or when the landlord reserves the right to pass on increases in operating expenses to the tenant. In addition to expenses, there is a whole host of issues to deal with including: the level of insurance required, the handling of improvements and changes, restrictions on signage, restrictions on use, responsibility for repairs, and termination, to list a few. An attorney can help you negotiate the terms of your lease and make sure you understand the obligations you are agreeing to when dealing with your landlord.

Tamlyn Frederick