Choosing a Lease Type
Non-Residential or Commercial Leases vary widely because they are virtually entirely negotiable between the landlord and tenant. The most commonly used commercial leases fall into three broad categories.
- Modified Gross Lease. In a gross lease, the landlord pays for all maintenance and operational expenses as part of the rent. A modified gross lease is a variation that's common when there are multiple tenants in a single property, such as in an office building. Commonly, the tenant will pay for expenses directly related to their unit such as repairs, maintenance, and cleaning. The landlord covers those expenses for common areas as part of the rent. In some cases, if common expenses rise in future years, the tenant will have to pay their proportional share of the increase in addition to their rent.
- Triple Net Lease. In a triple net lease, or Net-Net-Net Lease, the tenant pays for property taxes, building insurance, and maintenance. If there are multiple tenants, the expenses are allocated proportionally. Having these expenses separated from the rent protects the landlord from losing money if the expenses rise sharply. You can see a Triple-Net Lease here.
- Double Net Lease. Also called a Net-Net Lease, a Double Net Lease has the tenant pay for property taxes and building insurance. The landlord maintains responsibility for maintenance, giving them more control over the condition of the building. The landlord still avoids the risk of property tax and insurance increases.
Rent and Escalation Clauses
Commercial leases typically last for several years, which helps guarantee tenants will not unexpectedly lose their business location. That added security is important for tenants but can be problematic for landlords as costs rise over the years. An escalation clause allows a landlord to raise the rent during a lease to cover cost increases and receive a return on increasing property values.
Escalation clauses may increase the rent each year or after a certain number of years. The clause may be for a fixed dollar amount, a percentage increase, or based on an external measure such as the rate of inflation.
Renewal and Early Termination
Renewal clauses give a tenant added security that they can remain in a location where they have invested in their success. In return, a landlord will often include an automatic rent increase in the terms of an automatic renewal. The renewal clause may also allow other negotiations or unilateral changes on things like who pays for certain expenses.
An early termination clause allows a tenant to exit a lease if their business fails or the location turns out to be a bad fit. With this clause, the landlord will typically include an early termination fee to offset any expenses and lost profits if they need to find a new tenant. An early termination clause can also reduce the chances of having to litigate over a broken lease.
Insurance and Indemnity
It is common for landlords to require tenants to carry commercial liability insurance and similar coverages. If someone is injured on the property or a tenant causes damage to another, the tenant having liability insurance gives the injured party a way to recover and reduces the chances that they will attempt to name the landlord in a lawsuit.
An indemnity clause requires the tenant to defend the landlord and pay claims that arise out of the tenant's actions. This could be included with or without an insurance requirement. An example of where this could apply is if a tenant's guest slips and falls in an area maintained by the tenant but attempts to sue the landlord.
The landlord typically carries their own coverage for the building as well as a liability policy to cover their own actions. The landlord's liability policy can cover accidents that happen in a common area that the landlord maintains or if a landlord's maintenance worker injures a tenant while working in their space.
Property Alterations and Maintenance
A commercial lease also needs to address everything from routine upkeep to major improvements and alterations. This varies based on both landlord and tenant preferences as well as the type of lease. An office building with many tenants often does most of the maintenance and upkeep and does not allow tenants to make many alterations. Retail and industrial properties generally allow tenants to fully customize their spaces and make tenants responsible for maintenance and upkeep. It is very important to define what services you provide, what you expect the tenant to do, and what the tenant is not allowed to do.
To get help drafting your Commercial Lease, reach out to a Rocket Lawyer On Call® attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.