Net Lease vs. Gross Lease
Contact Neufeld Legal PC for commercial leasing legal matters at 403-400-4092 / 905-616-8864 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 seeks to optimize its profit margin / cost recovery versus securing commercial tenants for the leased premises.
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.
Although this provides 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 negotiating, reviewing and drafting lease agreements, and protecting your business’ legal rights thereunder, contact lease lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.
Contact us via email at chris@neufeldlegal.com or call 403-400-4092 / 905-616-8864.