Commercial leases are legally binding contracts between commercial tenants and landlords of commercial property. A commercial lease permits the tenant to use said property for commercial purposes for a certain amount of time in exchange for pre-agreed, regular rental payments. As a result, a commercial lease is vital reading for those looking to invest in the commercial property sector, let their commercial property to a business tenant, or rent a property for commercial purposes.
As well as setting out the terms and conditions of the transaction (including basics such as the property type, address, tenancy length, rent chargeable, and details of any deposit required), commercial leases stipulate the rights and responsibilities of both parties during the tenancy. As our commercial property estate agents often explain however not all commercial leases are created equal.
There are in fact many different types of commercial leases used by business tenants, landlords and commercial property investors within the UK. In this blog post, our commercial property estate agents detail the main types of commercial leases available.
The percentage lease
These commercial leases are commonly used in larger commercial spaces – such as shopping outlets, hotels, train stations and airports – which are generally shared by a multitude of business tenants. As the name suggests, percentage leases calculate rent as a fixed percentage (usually 1 to 15%) of the tenant’s retail turnover.Â
These commercial leases also take the current base rate into this percentage, meaning if their tenants don’t generate much turnover, percentage lease landlords can still cover their own costs.
The percentage lease proven particularly beneficial to tenants during the recent Covid-19 pandemic. Landlords with this commercial lease type were more likely to drop turnover rents rather than have their tenants break their leases and leave their commercial properties unoccupied.Â
As the economy recovers however, percentage lease landlords are set to reap the rewards of their continued flexibility and patience. With business turnovers increasing, percentage lease tenants will pay more in rent meaning landlords make more money when compared with other types of commercial leases.
The gross lease
For the managed spaces our commercial property estate agents also help landlords to purchase, sell and maintain, the gross lease may be a better option.Â
Gross commercial leases involve a single fee that covers the cost of the tenant’s rent for a set, short term period. It is however important to note that this gross fee does not cover expenses like property tax, maintenance charges, utility costs and insurance, which may not seem like much of a fair deal, right?
This type of commercial lease generally means less flexibility for the tenant and higher rental costs. Landlords offering gross leases tend to inflate rental costs to provide an added level of security for their short-term rentals.
Most commercial leases that use the gross method aren’t strictly gross leases. Most are modified to ensure the tenant is responsible for certain charges such as utility costs but can be negotiated to their specific requirements. By law, UK tenants are also liable to pay selected property taxes, such as business rates, which is another reason why true gross leases are rare nationwide.
The net lease
Net commercial leases are available as varying tiers, namely single net (also known as ‘N’), double net (NN), and triple net (NNN). Each commercial net lease option involves the payment of the net value of certain items.Â
Single net leases for instance include the payment of the net value of bare, base or minimum rent along with taxes. The double net lease goes one step further, with the net value of bare, base or minimum rent; taxes; and insurance due. The triple net lease is the most comprehensive with the net value of all charges (including bare, base or minimum rent; taxes; insurance; and maintenance) allocated to the tenant.
Due to business rates being the tenant’s responsibility to pay in the UK, single net commercial leases are extremely uncommon. Double net leases are much more widespread with commercial premises consisting of multiple units finding the NN lease the most convenient.Â
Also referred to as ‘Full Repairing and Insuring Leases’ (FRI), triple net commercial leases ensure a hands-off approach and a passive income for landlords as well as increased freedom and control for commercial tenants who want to run their businesses their way.
As our commercial property estate agents often advise, commissioning an independent survey and devising a detailed Schedule of Condition to record the condition of the building is vital before the tenant occupies the building. Triple net commercial leases involve greater risk for the tenant. With a survey and Schedule of Condition however, due diligence can be completed to a high standard and the tenant-landlord relationship can progress without any unnecessary issues or disputes.
Which commercial lease is right for me?
Whether you are an investor, landlord or tenant, knowing which of the commercial leases mentioned above is right for you is essential. Thankfully, our commercial property estate agents are here to support and advise you every step of the way.
Weighing up the risks and rewards, and striking the right balance will ensure you select the commercial lease that will provide the best results in the short and long term. Some commercial leases incur more risk and responsibility, while others may mitigate risk but involve higher costs.Â
Take the time to understand your commercial lease options with a little help from our dedicated team. We’ll help you undertake due diligence to the required standard and make your commercial let work for you.Â
Coming to the end of a commercial lease? Our commercial property estate agents can assist with lease renewals and rent reviews too. Our commercial property experts have decades of experience assessing the market, setting appropriate lease terms, delivering rental advice and support, and negotiating renewals on behalf of our clients.
Contact Rory Mack Associates today to discuss your commercial lease requirements, and negotiate the complex world of landlord/tenant law with confidence and clarity.
