What are the Different Types of Commercial Property Leases?

At first, glance, projecting the cost of renting space in a commercial building may seem pretty straightforward. Once you and your team decide on a commercial space to lease, you negotiate a cost and terms, sign on the dotted line, and move into the space. In reality, fully understanding a commercial lease requires attention to detail and help from a tenant broker.

What are the different types of commercial leases? Who will be responsible for paying property taxes? Who will pay for utilities? Who pays insurance?  Which type of lease are you currently under? What are your responsibilities in a modified gross lease, net lease, or absolute lease? That’s critical to understanding both your responsibilities and your risk as a tenant or landlord.

To discover the answer to those important questions, you need to know exactly what kind of commercial lease you are signing. Let’s review the different types of commercial real estate leases so you’ll know what to expect as far as cost and how to negotiate an agreement

In this article, we’ll discuss the remaining type of commercial lease which we discussed in the earlier article, and what it means for tenants and landlords.

Read Part 1 – What Are The Different Types of Commercial Lease?

What Is A Commercial Lease? 

Unlike a residential lease, a commercial lease is an agreement between a tenant and landlord outlining the property strictly for commercial or business use.

Different Types of Commercial Leases –

Absolute Net Lease

Also called an absolute lease or an absolute triple net lease, these agreements put all of the building’s financial responsibilities on the tenant, including taxes, maintenance, insurance, repairs, and more. This gives them control and freedom on the property, but it also means full liability in the event of a catastrophe or total loss.

Percentage Lease

This is a common lease in shopping centers in malls and retail spaces, requiring tenants to pay a base rent, plus a percentage of their monthly sales. The percentage goes toward building operating expenses and maintenance, though there is no set fee for these costs.

Modified Gross Lease

A modified gross lease is quite similar to a gross lease, except for a few things. Though the rent is requested in a lump sum from the tenant, there exists a scope for a compromise between the parties. The parties to the agreement can negotiate on the costs which can be included in the base rental rate. Moreover, expenses such as janitorial services and electricity are excluded from the list. Being tenant-friendly, a modified gross lease is more popular with the tenant community.

While entering into a commercial deal, one must explore different property options available in the market, speak to experienced owners, and consult the real estate agents and lawyers to better understand the clauses of a leasing agreement.

Here are 8 of the most common commercial leases and how responsibilities break down under each.

Negotiation Tips for Commercial Lease and Exceptions

Nothing says you can’t try to negotiate one of these leases with your potential landlord or tenant. Your lease can be anything you want it to be, and satisfactory terms can often be hammered out with one or more variations.

The most important rule of commercial leases is for tenants to read their leases carefully, and clarify exactly what expenses they have responsibility for. Circumstances under which additional charges will occur should be identified and caps negotiated.

Remember this: every contract is different, and every contract is negotiable. Read the fine print and review it with your real estate agent and attorney before signing.