What is the Tenant Responsible For in a Commercial Lease?
If you need a space for your new business or are taking your current business to the next level, then it is a safe bet you will be signing a commercial lease. There are several types of commercial leases, making it important to know what you are getting into before you sign that contract. Read on to learn about the responsibilities a commercial tenant will have to assume upon signing of a lease.
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Gross Lease / Full-Service Lease
A gross or full-service lease stipulates that the landlord picks up nearly all the operating costs of the building. The tenant will be responsible for telephone and data transmission. Some of the operational costs may be passed onto the tenant in what is called the “load factor.” Load factors are typically reset annually, based upon the prior year’s operational expenses.
Many times, there are provisions in the lease agreement that state if the current year’s operating budget is not sufficient, the landlord can collect additional funds to make the operations account whole. In some cases, the landlord has a margin factor in utilities for the building beyond that of the utility invoices.
A full-service lease will be the highest monthly rate per square foot, in comparison to other lease types. This type of lease is normally used in a multi-level office building, with shared facilities like restrooms and a lobby. This is in contrast to leases where the tenant is to pay a percentage of maintenance costs for common areas, such as the lobby, which feature a lower rent.
Modified Gross Lease
For new businesses that need greater cash flow, the modified gross lease could be a good option. The modified gross lease is sometimes referred to as a modified net lease. It is a marriage between a triple net lease and a gross lease.
With this type of lease, the tenant is responsible for paying base rent during the first year of the lease. In subsequent years, the tenant may then become responsible for a percentage of the building’s operating costs. If the city increases property taxes for the building, then the tenant may also be responsible for a percentage of the increase.
Modified gross leases are typically used in office complexes without interior common areas and in small retail/strip centers.
Triple Net (NNN) Lease
A triple net (NNN) lease places most of the costs associated with the building into the responsibility of the tenant. In an NNN lease, the tenant pays a pro rata share of the total cost of building expenses. The tenant is financially responsible for all of the following:
- Property Taxes
- Capital Improvements
- Management Fees
Some examples of typical property maintenance include repair to electrical, plumbing, mechanical, and HVAC costs. In Southern Nevada, one of the largest concerns for maintenance and repairs is the HVAC systems.
NNN leases are typically used in industrial buildings or complexes and single tenant free-standing buildings of all use types. NNN leases will typically be the lowest price per square foot in comparison to the other lease types.
If your business falls within the restaurant or retail industries located in large retail centers and malls, then the type of lease a landlord will offer you is most likely the percentage lease. In a percentage lease, the tenant pays a base rent and a percentage of the business’s gross profit. The two combined make up the total rent.
A percentage lease is the most complicated of the lease and, normally, there are many terms and conditions that can be negotiated to make terms satisfactory for both landlord and tenant. Nothing is “set in stone” until you sign your name.
Other Lease Types
Each market has its unique set of standard leases, therefore, in other markets, you may see single and double net leases, or bond leases. The lease types referenced above are the ones most commonly used in Southern Nevada.
What are Tenant Rights in a Commercial Lease?
Commercial leases often do not afford tenants many rights. You have read about the list of responsibilities within each type of lease, but what rights do you have as a tenant?
Negotiating Lease Terms
The terms in your lease are your strongest protection against unforeseen costs or liabilities. Make sure you include provisions that allow you to cover large repairs, capital improvements, and deduct cost from the rent. A provision should also be included that makes your landlord responsible for any repairs that adversely affects your business, provided he or she has proper notification. All of the above-mentioned lease types allow landlords to collect management fees, but some landlords use an above market rate as a source of additional income.
You also have the right to ensure the terms for building maintenance does not include bringing the building into legal compliance with building codes. This includes fire, building, and safety codes.
It is important to have a seasoned and experienced commercial broker who is familiar with the lease terms, market tolerances, and landlord experiences to represent your best interest not the landlords.
Right of Tenancy
During the length of your lease, if you are current on all obligations, you have the right to run your business as you see fit, subject to the agreed use in the lease, as well as rules and regulations for the property. You can occupy that space during the whole length of your contractual term.
Unless specified in your lease terms, your landlord cannot arbitrarily raise your rent or associated costs. Most leases include an annual increase that is either tied to CPI or a fixed percentage. For the last several years, we have seen annual increases ranging from 3% to 4%.
You don’t have to be in the dark when a potential landlord hands you a lease with terms you aren’t comfortable signing. Working with an experienced commercial real estate agency can help you navigate the complex process of finding the right lease and negotiating the best deal for your business.