Are you under the impression that that the amount of rent spelled out in your lease is all that you have to pay to the landlord on a monthly basis? Are you familiar with the terms Base Rent, Operating Costs, Common Area Maintenance Costs? Do you know what services the landlord is required to provide to you? To be in the strongest position possible when negotiating the terms of your lease, it is important to understand the nuances between a Triple Net Lease, Full Service Gross Lease, Modified Gross Lease or Percentage Lease. There are other types of leases, but not all can be addressed in this blog.
Full Service Gross Lease: On the other end of the spectrum is the Full Service Gross lease. In this type of lease the landlord is responsible for all the cost of the payment of taxes, CAMS, insurance and utilities. All of these costs are included in the Base Rent amount. The tenant is typically responsible for their own property insurance and taxes and any excess utility consumption beyond building standards. Further, Tenant is typically responsible for their proportionate share of any increase in base operating expenses over a base year.
The Landlord in a Full Service Gross lease is responsible for the amount equal to one hundred percent (100%) of the property operating costs during a base year and that amount is usually paid by landlord during each lease year throughout the term of the lease. The base year is typically a calendar year that the landlord picks and is the floor over which any increases in operating expenses will be passed on to the tenants of the property.
Full service gross leases are typically found in office buildings.
Modified Gross Lease: There are numerous types of modified gross leases that are commonly utilized in multi-tenant office buildings. A modified gross lease is similar to a full service gross lease, except that some of the base services are not included by the landlord. The most common types of modified gross leases exclude maintenance, janitorial and electrical. This type of lease is commonly utilized in multi-tenant single floor office buildings.
Percentage Rent Lease: The most common lease utilized in the retail industry is the net lease. Most retail centers utilize a net lease where the owner oversees the common area maintenance (CAM) and this expense is divided among the tenants as in any multi-tenant facility. Retail lease can have a provision where the landlord will receive a percent of the gross sales of the business after reaching an established dollar volume of the business.
A Percentage Lease typically requires a tenant to pay base rent and then on top of that amount, the tenant also pays a percentage based on monthly sales volumes. Percentage leases are commonly executed in commercial retail leases.
An underlying concept of the percentage lease is that both the landlord and the tenant should share in the locational advantages of the leased premises. Most percentage leases are based on a percentage of gross sales. Utmost care must be taken to adequately and fully define gross sales. It is particularly necessary to differentiate the applicability of the percentage to credit sales, sales made at other store locations, credit card discounts, mail orders, etc.
Perhaps the most important thing to remember is that all leases are negotiable in some way. Asking questions and understanding what type of lease you are looking to sign will put you in the strongest negotiating position possible. However, if you do not understand any term or ramifications of certain provisions, it pays to get a lawyer to explain the provisions to you.
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