Every business enterprise will likely enter into a commercial real estate a lease at some point. The commercial lease is a very complex legal contract. Few business owners will actually read, understand and negotiate the term details that on its face may look like “boilerplate”. It is not boilerplate. Attorneys draft leases for the benefit of their client, which in 99% of the cases is the landlord. Commercial contracts are strictly interpreted.
While base lease rates are important, there are always terms buried in the lease that will affect how much the business will actually be required to pay the landlord. For some tenants, the news may come as a surprise. Do not be surprised. Get legal help before the lease is signed. The cost of review and negotiations may be totally insignificant as compared to the costs a tenant is actually required to pay in the event of certain circumstances.
Leases need to be understood before they are signed. Make sure every provision is understood and agreed to before the lease is signed. Many clients have been surprised that landlords are actually willing to negotiate the “boilerplate”. A real estate broker or agent representing the tenant may likely have some valuable insight with respect to the premises, the market and some lease terms, but they are not lawyers and they will not be the ones going to court with the tenant in the event of a dispute.
There are several commonly used types of leases, though there are thousands of variations. Be careful. The label does not control the content.
Full Service Lease
The Full Service commercial real estate lease is predominately used for commercial office space for lease in multi-tenant buildings. The Full Service lease almost always includes in the base rental rate, all real estate taxes, insurance, maintenance, cleaning, and utilities.
In a Gross lease, the tenant pays a set amount of base rent and the landlord is responsible for payment of taxes, insurance and other costs associated with owning the property. The rent includes landlord’s estimate of the real property expenses. The tenant is usually required to pay for all its utilities.
In a Net lease, the tenant pays the rent plus a portion of the maintenance fees, insurance premiums and other operating expenses. This is usually less than the actual cost of all expenses associated with space being rented.
Triple Net Lease (NNN)
In a Triple Net lease, the tenant pays for all fees, taxes, insurance and operating expenses associated with the space. This often includes management fees, property and related taxes, including new taxes if the building is sold during the term of the lease, insurance, maintenance, security, capital improvements and more. If uncapped, the tenant is exposed to considerable and uncontrolled space expenses.
Shopping Center Lease (Percentage Rent)
In a Shopping Center Lease, also commonly referred to as a Percentage Rent Lease, the tenant pays a base rate for the retail facility, plus a certain percentage of the gross sales of the tenant’s business. Typically, the tenant will also pay many common areas charges, part of the property taxes, marketing, management expenses, utilities, janitorial, and maintenance. A shopping mall lease will often include terms about signage, hours of operations, common areas and deliveries. The landlord may also have the right to relocate the tenant to another location on the premises.
In a Ground Lease, the tenant leases the land on a long term basis and constructs a building on the property at its own expense. Typically, with a ground lease, all improvements made on the property, including any building or buildings revert back to the landowner at the end of the lease term.
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