Blog - Understanding the 7 Types of Commercial Leases

Understanding the 7 Types of Commercial Leases

Different types of commercial leases can affect a company’s bottom line in a variety of ways. From understanding how rent and other fees are calculated to knowing which expenses will be your company’s responsibility, it’s important to conduct a thorough review of any commercial lease before it is signed.
Leases can be a crucial factor in the long-term survival of your business. The terms you agree to can act as a “slow leak in your tires” or can put you at risk for significant expenses if something unexpected occurs. The good news is that every lease is negotiable. Learn seven types of commercial leases and what you need to know before signing your next lease.

What you need to know about commercial leases

According to FindLaw.com, a commercial lease is a legal contract made between a landlord and organisation for the rental of property. Understanding commercial leases is important because terms are negotiable and vary greatly from lease to lease. Before signing, your organisation should review the lease with your attorney and fully understand your rights and responsibilities. Commercial lease agreements will typically include the following:

  • Initial rent amount and annual increases
  • Security deposit
  • Length of the lease
  • Description of the property and rules governing improvements
  • Use clauses, including exclusivity to prevent rental to competitors
  • Subletting rights

Why businesses need to be prepared for negotiation

Before your business rents commercial space, it’s important to understand that any type of commercial lease is different from residential leases. Most consumer protection laws don’t apply to different types of commercial leases. Additionally, Nolo.com points out that there are no standard forms used in commercial lease agreements. Since it’s typically a multi-year, binding contract, it’s imperative that you carefully examine the entire agreement and negotiate the best terms possible before signing. Aside from the rental amount, your organisation should also consider other items that may be critical to your success, such as the ability to put up signs to attract walk-in customers or adding wiring to improve electronic communication capabilities.

Seven types of commercial leases

When renting office space, a landlord can choose one of seven types of commercial leases:
1. Full service or gross lease
In this type of lease, the tenant pays base rent only. The landlord pays all building expenses including maintenance costs, insurance, and taxes. However, a landlord may recoup costs through the building’s load factor, which is rent paid for any of the building’s common areas.
2. Modified gross lease
Similar to the above, tenants pay base rent only for the first calendar year of the lease. After that, the terms change so that tenants share in the building’s operating costs with the landlord. For example, a business occupying 25% of a building, will pay 25% of operating costs.
3. Net lease
In a net lease, the tenant pays rent plus a specific percentage of the building’s operating expenses. Scrutinise your lease agreement to understand how expenses are broken out. All types of net leases are usually written to benefit the landlord’s interests.
4. Double net or “net net” lease
Tenants pay rent, taxes, and insurance in the “net net” lease. The landlord covers any maintenance costs.
5. Triple net lease
In this agreement, the tenant pays rent plus their pro-rata percentage of all building operating expenses. The landlord pays only base building maintenance and repairs.
6. Absolute lease
A major difference to understand with this lease is that the tenant is fully responsible for the building including maintenance or repair to its structure and roof. This type of lease is typically available only to large corporations with brilliant credit.
7. Percentage lease
This lease is typically offered in retail spaces so that the tenant pays rent plus a percentage of monthly sales.

Get your office space in order

Office space is a big expense, and one that’s always in flux. Understanding commercial leases is important to ensure your business secures the best terms. Asure Software can be a strong partner in helping you manage your space, occupancy, and assets to meet your changing workspace needs.

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