Commercial Confusion: What Types of Leases Are There?

Whether you’re in the possession of a commercial property and want to rent it out, or you’re considering starting up your own business, you have to learn about leases. It can be a confusing subject especially for people that haven’t dealt in properties before, but this brief guide will hopefully get you on the right track and give you enough information to get you started.

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What is a lease?

 

First, let’s define the word so you have a better understand of what it implies. A lease is essentially a contract that outlines the terms and conditions that someone has to agree to when renting a property owned by someone else. The tenant, in this case is, known as the lessee, and the landlord is known as the lessor. A lease typically guarantees that the lessee pays a specific amount of rent to the landlord for a specific number of years or months, and they both face consequences if either one cannot uphold their end of the contract.

 

However, there are various types of leases, and this post will explain the main differences, as well as a brief summary of the advantages and disadvantages that each one brings so you know how to make the best decision.

 

Fully Serviced Lease (Gross Lease)

 

A gross lease typically means that the landlord pays for the building’s property taxes, insurance and maintenance. It can, however, be modified so that the tenant pays for specific expenses such as utility bills. This means it’s extremely important that you double check the lease conditions and terms before you put your signature down. Make sure you calculate all the costs that you’re expected to pay and negotiate anything that you think is unfair or could be changed.

 

A gross lease can end up costing a tenant more than they bargained for despite the landlord being responsible for the majority of the costs. The rental fee is based off an estimate of associated costs which is defined by the owner, which means that the landlord may overestimate costs just to increase rent.

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Net Lease

 

There are several different types of net lease and they are the complete opposite to a gross lease. For example, a triple net lease means that the tenant has to pay for taxes, insurance and maintenance in addition to rent. A double net lease only requires the tenant to pay taxes and insurance on top of rent, and a net lease means the tenant has to pay some or all of the taxes, insurance or maintenance.

 

Although it sounds heavily in favour of the landlord, a net lease can actually be a beneficial investment for a tenant because they have more control over things like building repairs. This can, however, backfire on the landlord because if a tenant refuses to report and pay for building maintenance, it could cost the landlord money in the future to fix those issues. Net leases are more common in commercial properties and usually favour the landlord in one way or another, so it’s important to discuss all the terms before signing the lease.