NET LEASE VERSUS GROSS LEASE

Experienced commercial leasing lawyer for real property and equipment lease arrangements (in Alberta and Ontario, Canada).

Contact Neufeld Legal PC at 403-400-4092 or Chris@NeufeldLegal.com

In the world of commercial real estate, landlords never seek to be outdone when it comes to the rent that they charge commercial tenants for renting the leased premises.

Nevertheless, the manner in which landlords structure rental payments can vary substantively, based on how the landlord believes it will best incentivize a prospective tenant to commit to the proposed lease arrangement.

As such, we find landlords utilizing two common forms of lease arrangements for purposes of leasing commercial real estate, namely a Net Lease and a Gross Lease.

A net lease involves a composite rental fee arrangement, consisting of (i) a consistent base rent that is paid on a recurring basis, subject to a specified escalation arrangement, and (ii) a variable rental charge, typically equivalent to the tenant’s proportionate share of the building and real property’s insurance, realty taxes and operating expenses incurred by the landlord.

A gross lease involves a consistent, single rental fee arrangement, which also may be subject to a specified escalation arrangement, such that it establishes at the outset of the lease term what the recurring rental fee shall be for the entirety of the lease term, irrespective of any fluctuation in the landlord’s costs in operating the building and real estate.

This means that if there is an increase in the landlord’s cost as to the building and real property’s insurance, realty taxes or operating expenses, there would be no impact on the commercial tenant’s rent payments under a gross lease, whereas the commercial tenant under a net lease would incur a proportionate increase in rental payments, by way of additional rent, to offset the added cost incurred by the landlord, as per the written lease agreement.

It also means that there is greater certainty as to the rental payments for a commercial tenant under a gross lease, as opposed to a net lease; however, it is also the reason that it is far less frequent, as the landlord needs to absorb those increases in the building and real property’s insurance, realty taxes and operating expenses.

In turn, landlords tend to limit the use of gross leases, if at all, to small commercial spaces and/or shorter lease terms, as might be the case where a single room is being leased within a commercial building.

Given the interest of landlords to shift any added costs to their commercial tenants, net leases, and in particular triple net leases, are the preferred rental arrangement for commercial real estate .

For knowledgeable and experienced legal representation in commercial leasing matters, whether that entails lease review, drafting, negotiation and enforcement, contact commercial leasing lawyer Christopher Neufeld at Chris@NeufeldLegal.com or 403-400-4092 / 905-616-8864.

Importance of Commercial Lease Review: Even though most commercial lease agreements are viewed as standardized and with very little flexibility for change from the landlord, it is nevertheless important that commercial tenants have some degree of legal review of their commercial lease agreements in advance of signing them. Read More.

 

Net Lease versus Gross Lease: In the world of commercial real estate, landlords never seek to be outdone when it comes to the rent that they charge commercial tenants for renting the leased premises. Nevertheless, the manner in which landlords structure rental payments can vary substantively, based on how the landlord believes it will best incentivize a prospective tenant to commit to the proposed lease arrangement. Read More.

 

What is a Sublease? A sublease is a legal agreement whereby an existing tenant / lessee (the "sublessor") rents out a portion of their leased premises to another party (the "subtenant" or "sublessee") for a portion of the original lease term. A key characteristic associated with a sublease is that the original tenant remains fully responsible to the landlord for the rent and all the terms of the original lease agreement, and most often requires the written consent of the landlord to proceed with the sublease (so as not to breach the original lease agreement). Read More.