Types of Commercial Leases
Tuesday Apr 17th, 2018
Many business owners choose to lease space in which to operate their business and it is important to know what type of lease you are signing.
The most common commercial lease agreements are "triple net leases” and “gross leases".
In a triple net lease the tenant pays rent to the landlord, as well as all taxes, insurance, and maintenance expenses that arise from the use of the rental space. The tenant would pay a fixed amount of rent each month (called the base rent) as well as an "additional rent" payment which is an estimated amount for taxes, maintenance and insurance expenses (referred to as TMI). At the end of the lease year, the estimated amounts are compared to actual expenses and an adjustment is made depending upon whether the tenant paid too little or too much through their monthly payments.
By contrast, in a "gross lease” the landlord agrees to pay all expenses which are normally associated with ownership, such as maintenance & repairs, insurance and taxes. The tenant pays a fixed amount each month, and nothing more. A landlord involved with a gross lease has likely factored in the various expenses when agreeing to accept a fixed monthly payment. A gross lease is ideal when a tenant is renting for a short period of time or just a portion of a unit where it would be difficult to factor the associated costs of the space.
In a double net (or net-net) lease, the tenant is responsible for paying the property tax and building insurance costs and the landlord is responsible for any expenses incurred for structural repairs and common area maintenance. In a single net lease the tenant is responsible for paying the property tax portion of their rented space and the landlord pays the remainder of the associated costs.
While commercial leases vary, residential leases for the most part are always gross leases. The the landlord is responsible for paying property taxes, repairs, maintenance and insurance and the tenant is only responsible for their rent and sometimes the utilities.
Unlike residential leases, Ontario does not provide much guidance in terms of what is required in a commercial lease, so the terms that make up a commercial lease are based on negotiation between the landlord, the tenant, their agents and their lawyers. Whether the lease is "triple net", “net-net”, “net” or "gross" it is important that the terms and provisions are spelled out clearly in the lease agreement and all parties are aware of who is paying for what.