4 Types of Commercial Leases

It is important to be knowledgeable about your lease(s). They serve as a binding, legal agreement between the property owner and the tenant(s).

Knowing this, you want to ensure that it thoroughly addresses the rules, policies, and conflict-resolution procedures for living in the rental property and clearly defines tenant and landlord responsibilities.

Here are four types of commercial leases you will find in the real estate industry:

Gross leases are most commonly found in commercial properties like offices and retail space. The landlord is responsible for paying taxes, insurance, and utilities from the rent fees from their tenant(s), who pay a single, flat amount that encompasses rent, taxes, utilities, and insurance.

Within gross leases, there are two different subtypes known as modified and full service. A modified gross lease allows for negotiation between the landlord and the renter to determine which utilities will be covered by each party.

A full-service lease is where a tenant pays a flat fee, and with the rent costs, the landlord is responsible for paying all incidental costs. Full-service leases are more expensive for the renter, but they are easier for the renter to budget. 

Net Lease

A net lease, contrary to the gross lease, has the renter paying not only a fixed rent to the landlord but also covering incidental costs. This type of lease is used by owners who do not want the complications of paying incidentals or taking care of the property and are also common for commercial property.

Within net leases, there are three different subtypes known as single net leases, double net leases, and, you guessed it, triple net leases. These subtypes refer to the number of expense categories the renter is covering, those categories being taxes, insurance, and maintenance.

A single net lease covers one of the three, a double net lease covers two, and so on. Long-term rentals often use double and triple net leases. 

Percentage Lease 

Percentage leases are another type of lease used commercially, and it involved as fixed rental rate and a percentage of the profits of the business renting the premises. With this agreement, there is an opportunity for a lower rental rate and potentially more money for the landlord if the lessee does well.

There is also an opportunity for the renter to pay less in rent if they are successful. The percentage clause often does not begin until the renter reaches a certain level of revenue called the “breakpoint.” The purpose of this is to give the property owner an incentive to provide a good location to do business, whether it be retail in a busy shopping center or prestigious office space. 

Variable Lease

A variable lease changes according to certain conditions; within variable leases, there are two subtypes known as index leases and graduated leases. Index leases tie the rent price to some sort of index, whether that is the Consumer Price Index or possibly local rental market conditions.

An example of this could be a renter in a large urban center negotiating a yearly rent review based on average office rent in the city. Graduated leases increase rent amounts according to a pre-determined schedule.

An example of this could be a renter negotiating a yearly increase of 3% to be charged every January, but they can also be arranged seasonally. 

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