4 Types of Commercial Leases

A commercial lease agreement is a contract between a landlord and tenant that outlines the terms and conditions associated with renting commercial real estate property. There are four kinds of commercial leases, each with its own specific rules and regulations that can impact your business operations.  

For instance, one arranges predictable monthly payments that can help ease financial planning, while another sets rates based on a business’ gross revenue. Because there are so many variations between the different commercial lease agreements, navigating the options can be challenging. 

The good news is that you don’t need a law degree to decipher all the fine print. Let's unpack the differences among these four commercial lease agreements and discuss the importance of partnering with a lawyer to help you decide on the right lease for your business. 

4 types of commercial leases explained

The four kinds of commercial real estate leases include gross leases, net leases, modified gross leases, and percentage leases.

Gross lease

A gross lease, also called a full-service lease, refers to a rental agreement in which the tenant pays a fixed monthly payment. The landlord usually determines that flat rate after calculating the expenses that go into maintaining and operating the property, such as property taxes, insurance, maintenance fees, and sometimes even utilities. 

Since tenants pay a set monthly fee, a gross lease is considered a tenant-friendly option because it provides them with a predictable monthly payment, making it easier to budget each month. However, because the landlord is bundling all those costs into one rate, it could potentially make it an expensive monthly fee.  

In short, under a gross lease:

• The tenant pays one flat rate each month
• The landlord covers any additional property expenses

Net lease

A net lease is another type of commercial lease in which the tenant is responsible for paying a flat monthly rent payment plus additional property expenses, such as property taxes, building maintenance, and insurance. There are several types of net lease agreements, including a single net lease (N), double net lease (NN), triple net lease (NNN), and absolute triple (NNN) net lease.

A single net lease, or N lease, is a commercial rental agreement in which: 

• The tenant pays a base rent and property taxes on the rental
• The landlord pays property insurance fees and maintenance costs 

Then, there’s a double net lease, also known as an NN lease. Under this double net lease structure:

• The tenant pays a base rent along with property taxes and insurance premiums
• The landlord is only responsible for covering maintenance costs

That brings us to a triple net lease or NNN lease. This lease determines that:

• The tenant covers all costs, including base rent, property taxes, insurance premiums, and maintenance and repair expenses
• The landlord may be responsible for structural and roof repairs but otherwise doesn’t have any additional expenses

Finally, we have the absolute net lease or absolute NNN lease which is an extension of the NNN lease. So, who pays what under an absolute NNN lease?

• The tenant pays for all expenses, including rent, taxes, insurance, maintenance, and even structural repairs
• The landlord does not pay anything related to the property 

Under these net leases, landlords typically charge lower base rents to accommodate the other expenses the tenants are covering. 

To recap, depending on the type of net lease:

• The tenant pays rent plus additional operating expenses, such as taxes, insurance, and/or maintenance fees
• The landlord only covers some—or none—of those additional charges 

Learn more about the differences between a gross lease and net lease.

Modified gross lease

A modified gross lease is another type of commercial lease, like a cross between a gross lease and a net lease. It’s like a gross lease in that the landlord charges the tenant a base rent. And it’s like a net lease in that the tenant also pays a proportion of other costs, such as property taxes, insurance, maintenance, or even utilities. 

There is no set formula for calculating those additional costs, so these expenses will vary from one lease to the next. For example, some landlords might charge a pro-rata share, while others may determine an expense stop that caps the amount the landlord will cover. Due to these variations, tenants must review the contractual agreement to understand what fees they’re agreeing to pay. 

In summary, under a modified gross lease:

• The tenant pays rent and a proportional share of property costs
• The landlord covers the remaining share of property costs

Percentage lease

Let’s move on to a percentage lease. This lease structure is unique because the tenant is responsible for paying a base rent and a percentage of the gross business sales the tenant’s business earns on the landlord’s property. This type of commercial lease is common with businesses that rent retail space in shopping centers. 

When a landlord and tenant negotiate the percentage lease terms, they agree on a fixed rent rate and a break-even point, which determines how much in sales the tenant must generate for the percentage of sales to kick in. 

To review, when a percentage lease is in place:

• The tenant pays a base rent plus a percentage of their sales revenue earned at that property
• The landlord covers maintenance and operating expenses

Tips for choosing the right commercial lease type

Because each type of commercial lease comes with its own terms and conditions, the one you choose can impact your financial plan and business operations. For instance, you have predictable monthly payments with a gross lease, but with a modified gross lease, your monthly payments may fluctuate depending on your sales. 

In light of this, the following are a few tips for choosing the right commercial real estate lease for your business. 

Ask yourself these questions

When deciding on what kind of commercial lease agreement is best for you, it helps to consider some of the following questions, as they can lead you to the rental terms that best suit your situation. For instance, the kind of business you run, how much money you earn each month, and the kind of rental space you want to rent could influence your decision. 

• What kind of business do you operate?
• Do you oversee an established business, or is this a new endeavor? 
• What is your business model?
• Does your business generate a predictable income? 
• What are your long-term business goals?
• What kind of maintenance might the rental space require? 

Evaluate your budget

Before signing a commercial lease agreement, it’s essential to create a financial plan and evaluate your budget. This involves calculating your revenue, assessing your monthly expenses, and determining how much you can comfortably put aside for rent and associated payments each month. 

With a better understanding of your financial situation, you can make a more informed decision based on your incoming and outgoing expenses.

Get legal advice

Let’s face it: Understanding contracts and legal jargon can be complicated. That’s why we recommend hiring a legal matter expert, like a commercial lease lawyer or real estate attorney, to help make sense of all the nitty gritty details for you. A lawyer will objectively look at your business, review your finances, and help you determine the best course of action. 

Your attorney’s role in the commercial lease process

Real estate and commercial lease lawyers understand the ins and outs of commercial real estate leases and have the expertise to guide you through the process. They’ll pour over every detail in your lease agreement, ensuring it’s legally fair and tailored to meet your needs. 

The following are just a few of the roles a professional will play in securing a suitable commercial lease agreement for your business.

Draft and review agreements

It’s your lawyer’s job to ensure your commercial property lease is legally sound. Your lawyer will draft and review the lease, combing over all the commercial lease terms and verifying that the renewal options, termination conditions, lease duration, payment amounts, and other clauses reflect what you and the landlord agreed upon. 

They’ll also explain the document in depth to you to make sure you fully understand both parties’ responsibilities and expectations. 

Negotiate

Your lawyer has your best interest in mind, so their goal is to lock down the most beneficial terms for you. They’ll hammer out all the details, such as those related to rent amounts, responsibilities, and termination options, and negotiate the most favorable conditions. 

Practice due diligence

A big part of your lawyer’s role involves practicing due diligence to help protect you and ensure the property is up to par. Your lawyer will do their homework, commissioning third-party inspections of the space and structure, examining the title, looking at regulatory requirements like zoning laws, and confirming that there are no potential liens or encumbrances.

Conduct risk assessment

In addition to conducting due diligence, your lawyer will help identify and mitigate potential risks and liabilities. Your lawyer will review both parties’ responsibilities and evaluate what might happen if one of you doesn't hold up your end of the bargain. They’ll look at default and remedy provisions, indemnity clauses, rent escalation clauses, relocation rights, insurance requirements, and more. 

Resolve disputes

Your lawyer has your back during the entire rental process. They’re dedicated to helping you resolve issues, from disagreements over property conditions to misunderstandings over termination terms. They'll use their negotiation skills and legal knowledge to compromise and help solve issues between you and the landlord, and if it comes down to it, they’ll represent you in court or arbitration.

Confirm compliance

Compliance helps protect you if any disputes arise, but If your commercial lease doesn’t comply with local, state, and federal laws, it won’t hold up in court. That’s why your lawyer will ensure your agreement adheres to all the appropriate rules and regulations, such as environmental laws, ADA requirements, zoning laws, building codes, tax laws, health and safety requirements, and tenant protection laws, among others. 

Finalize the transaction

Finally, your lawyer will oversee that all the appropriate documents are properly signed, sealed, and delivered. This step also involves ensuring all legal obligations are fulfilled, and payments are paid in accordance with the agreement. 

FAQs

Still have questions? Check out these answers to some frequently asked questions:

Are the terms of a commercial lease negotiable? 

Yes, the terms of your lease are negotiable, and you (and your lawyer) are encouraged to negotiate the best terms possible for you as a tenant. You can negotiate terms both in and out of the lease. That said, it will depend on the leniency of your landlord and how willing they are to budge on certain conditions. 

Are there any commercial leases that are particularly beneficial during economic downturns? 

While there are pros and cons to every type of commercial lease, some options may be more favorable during an economic downturn. 

For one, a gross lease is beneficial because the tenant pays a set amount each month, so they don’t face any unforeseen costs, helping to ease financial strain. Similarly, a modified gross lease is advantageous because the tenant pays a flat rate plus a proportion of the other operating costs, which could mean the tenant scored a more affordable base rate from the start. Furthermore, a percentage lease has its perks because a portion of the tenant’s payments are based on their revenue, so if their sales go down, the amount they owe the landlord also goes down. 

How often can landlords increase rent in a commercial lease? 

How often landlords can increase rent for commercial property leases depends on several factors, such as local and state laws and what’s outlined in the lease. Some commercial real estate leases allow landlords to increase rent upon renewal or changes in market rates. These terms are usually stated under the rent escalation clause in the lease, so it’s essential to review, understand, and negotiate these terms before signing and agreeing to the conditions.