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Types of Commercial Leases: An Essential Guide

4th January 2021

As a commercial estate agent and property management expert, we aim to take the hassle out of the commercial leasing process for both landlords and tenants. A vital and rather difficult part of our job as a commercial estate agent is working with landlords and tenants to ensure everyone is happy with their commercial let. An integral way of satisfying everyone is by negotiating a commercial lease that satisfies both parties. But with so many different types of commercial leases, how can you ensure you select the right one that fulfils your requirements?

Read on to discover the types of commercial leases currently available to UK commercial tenants and landlords, and find out how our property management specialists can help you choose the right commercial lease for you.

Full service lease

Also known as a gross lease, a full service lease guarantees full protection for the tenant. Under a full service lease, it’s the landlord who will cover all operating expenses, including insurance, maintenance, taxes and other property management costs. All the tenant is responsible for is paying the agreed rent. 

To ensure a full service lease is fair for all parties, landlords will often set a cap on the amount that they will be required to pay. This is referred to as an ‘expense stop’, and once this figure is exceeded, the tenant will be liable to pay the excess. 

Due to the limited financial liability for tenants, rent on a full service lease is generally more expensive than with other commercial lease types. The increased cost reflects the increased risk for the landlord.

Modified gross lease 

Unlike with a full service lease, a modified gross lease makes the tenant responsible for a percentage of the operating expenses (such as property management costs) and their rent. These operating expenses aren’t usually payable within the first year of their tenancy. The terms associated with this type of lease differ vastly from landlord to landlord, but it’s the job of your commercial estate agent to negotiate terms that are fitting for both the tenant and the landlord.

Single net lease

As your commercial estate agent will explain the operating costs of a commercial premises consist of three main parts, namely insurance, property taxes and maintenance. A single net lease makes the tenant responsible for covering one of these three operating expenses, leaving the landlord responsible for the remaining two. Single net leases are particularly attractive for tenants as they are responsible for fewer costs. 

Double net lease

A double net lease sees the tenant foot the bill for two of the three operating expenses, usually property taxes and property insurance. The landlord will then be responsible for covering the cost of property management and maintenance, which includes structural work and upkeep.

Due to the limited financial liability for the landlord, double net leases are popular with operating expense payments due alongside the tenant’s rent.

Triple net lease

As you may have guessed, a triple net lease sees the tenant cover all operating expenses – property taxes, maintenance and insurance. 

Often the rent on a triple net lease is lower than the rent paid with other net leases. Triple net leases are popularly offered by investors with steady income and less risk just two of the perks of this net lease type. They’re also commonly used when leasing larger office buildings, shopping centres and industrial parks that have greater property management requirements.

Absolute lease

An absolute lease goes one step further with the tenant of the commercial property not just covering all three major operating expenses and the rent but covering other property management costs, such as emergency repairs and structural work.

The absolute lease is a great way for landlords to protect their assets and pass the risk to their tenants.

Percentage lease

The percentage lease is generally only used by landlords and tenants of retail properties, and more specifically retail stores in shopping centres. 

With a percentage lease, a landlord agrees to set a base amount of rent to be paid by the tenant. This rent is usually based on the square footage of the commercial property. In addition to this, the tenant will then agree to pay a percentage of their business profits to the landlord. The percentage agreed will be influenced by a number of factors, including foot traffic and location.

As your commercial estate agent will explain, a percentage lease is an excellent, longer term investment for landlords who are willing to forfeit upfront earnings to realise bigger benefits at a later date.

Choosing your commercial lease

One of the best ways to choose the right commercial lease for you is to work with your commercial estate agent to understand the pros and cons of each lease type. Our property management specialists will be able to advise you on the right lease for your needs, whether you are a commercial landlord or tenant.

For further advice on the commercial leases currently available please contact our team on 01782 715725. Alternatively, please email enquiries@rorymack.co.uk to speak to one of our commercial estate agents.