Types of commercial leases: a quick guide

Here are some common types of commercial leases:

Full-service lease/ gross lease 

A full-service lease, sometimes called a gross lease, is where the tenant pays a single, fixed rent amount to the landlord. The landlord is responsible for covering most, if not all, of the property-related expenses. However, full-service leases can sometimes require the tenants to pay some of the operating costs for the property. This means the rent may include the base rent for the use of the space and various additional costs such as maintenance, repairs, property taxes, insurance, and utilities.

Full-service leases can be straightforward for tenants as they only need to budget for the monthly rent payment without needing to account for additional expenses separately. This also means tenants do not need to individually manage different payments, saving time and effort. 

Even though a full-service lease may simplify the financial aspect for the tenant, as mentioned above, this does mean the landlords may seek to incorporate additional costs into the overall rent amount. As a result, the base rent for a full-service lease might be higher than other lease types. Additionally, some full-service leases may include a cap on certain expenses or allow for adjustments over time to account for changes in operating costs. 

Modified gross lease 

A modified gross lease is where the tenant pays the base rent but is also responsible for paying certain property-related expenses, which are shared between the landlord and the tenant. This proportion of shares includes property taxes, utilities, insurance, and maintenance.

Modified gross leases are typically used for commercial spaces such as office buildings with multiple tenants. This type of lease typically falls between a gross lease, where the landlord pays for operating expenses, and a net lease, which passes on property expenses to the tenant.

The specific expenses that are shared may vary as there is room for negotiation between the landlord and tenant. This allows for flexibility to tailor the lease terms to the needs of both parties. As of this, each modified gross lease can be unique, so it is recommended to work with a legal professional to ensure there is a clear understanding of the lease terms and how they align with the needs of the tenant and the landlord.

Net leases: 

• Single net lease 

A single net lease is where the tenant is responsible for paying the base rent along with one other property-related expense. These are usually taxes incurred in relation to the property. Under a single net lease, the landlord is still responsible for the other operating costs involved with running the property. Single net leases are a less common commercial lease. This is because, unlike the other net leases, the landlord has more responsibility in a single net lease. So, the landlord will be responsible for fixing maintenance problems regardless of the time of the day. 

• Double net lease 

A double net lease (also known as a 'net-net' or 'NN' lease) is a lease agreement in which the tenant is responsible for paying the base rent along with two additional property-related expenses. This is usually property taxes together with the insurance premiums for insuring the property. The landlord is still responsible for structural maintenance expenses. Each month, the landlord receives the base rent plus the additional payments. As the tenant is responsible for two additional property-related expenses, the total base rent payable is often reduced. 

Double net leases provide a middle ground between a single net lease and a triple net lease (which will be explored next). The allocation of responsibilities can vary depending on the terms negotiated between the parties and the specific lease agreement. 

• Triple net lease 

A triple net lease (triple-net or N) is a type of lease where the tenant is responsible for paying the base rent along with all the property expenses. This includes real estate taxes, building insurance and maintenance. Typically, in commercial lease agreements, some or all of these payments are the landlord's responsibility. 

Triple net leases are commonly found in commercial real estate. They usually tend to have lower rents because the tenant assumes ongoing expenses that would otherwise be the landlord's responsibility. Triple-net leased properties have become popular with investors because they provide low-risk, steady income.

Percentage lease 

A percentage lease is a lease agreement where the tenant pays a base rent along with an additional rent based on a percentage of their gross sales made when conducting business on the property. This means the rent the tenant pays is tied to the success of their business. 

The tenant is usually required to provide regular sales reports to the landlord, which are used to calculate the additional rent based on the agreed percentage. Many percentage leases include a "breakpoint," which is a predetermined sale threshold. If the tenant is below a certain sale threshold, they only pay the base rent. Once the sales exceed the breakpoint, the additional percentage of rent becomes payable. 

Absolute lease 

An absolute lease, also known as an absolute triple net lease, is a lease that places virtually all financial responsibilities related to the property onto the tenant. It is one of the strictest forms of commercial leases. In an absolute lease, a tenant is generally responsible for insurance, taxes, maintenance, minor repairs, and larger structural repairs, which are typically considered the landlord's responsibility, such as roof replacement.

An absolute lease gives the tenant a higher degree of control over the property's condition and operation as they have responsibility for all aspects of the property management and maintenance. However, this shifts a significant amount of financial risk from the landlord to the tenant. Due to the tenant's financial obligations, absolute leases are not as common as other leases. 

Contact our commercial lease solicitors

Whether you’re a landlord or a tenant, seeking advice from a commercial lease solicitor before agreeing to terms is essential.

Commercial property leases are often complex and require an experienced solicitor to identify any onerous conditions and restrictions which can impede your business in the future.

Our solicitors assist landlords and tenants throughout the process - from the initial negotiations to the deal’s completion, ensuring you make informed decisions and that your interests are protected.

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