Types of commercial leases
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Contact our teamWhen entering into a commercial property agreement, it’s essential to understand the various types of leases available and how they may impact your business.
Commercial leases differ significantly from residential ones, with a wider range of structures, costs, and responsibilities. Whether you’re a landlord or a tenant, selecting the right lease type can significantly influence your financial and operational planning. Below, we explore some of the most common types of commercial leases, from the more straightforward gross lease to the more dynamic percentage or variable leases.
Gross lease
A gross lease is one of the most straightforward options in commercial property agreements, commonly used for office spaces and retail outlets. Under this arrangement, the tenant pays a single, all-inclusive rent. This payment covers not just the rent for the property but also taxes, utilities, and insurance, with the landlord responsible for covering these costs on the tenant’s behalf.
There are two key variations of gross leases. A modified gross lease allows for some negotiation between the landlord and tenant regarding utility costs. For example, the tenant might cover their electricity, while the landlord takes responsibility for waste disposal. A full-service lease, on the other hand, means the tenant pays a flat fee and the landlord handles all additional costs, making budgeting simpler for the tenant, though often at a higher rent.
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Partner | Commercial Property, Real Estate, Real Estate Finance
Full Repairing and Insuring (FRI) lease
A Full Repairing and Insuring (FRI) lease is a common type of commercial lease where the tenant is responsible for all repairs and maintenance, as well as the insurance costs of the property. In an FRI lease, the tenant bears the full expense of keeping the property in good condition, covering everything from internal repairs to external or structural upkeep, depending on the lease terms. The tenant also pays for building insurance, although the landlord typically arranges the policy to ensure adequate coverage, with the tenant reimbursing the cost.
FRI leases are often used for standalone commercial properties, such as retail units, industrial buildings, and office spaces, where tenants have more control over the property’s use and maintenance. This lease structure benefits landlords by reducing their maintenance and insurance obligations, while tenants gain autonomy over property management. However, tenants should assess potential repair costs before signing, as FRI leases can result in significant financial commitments, especially for older or larger buildings.
Net lease
A net lease shifts more of the financial responsibility to the tenant, making it the opposite of a gross lease. The tenant not only pays the base rent but also contributes to property taxes, insurance, and other associated costs. Net leases are popular in long-term commercial agreements and are ideal for landlords who prefer not to manage ongoing expenses like maintenance or repairs.
There are three common variations:
- Single net lease (N): The tenant pays rent plus one of the property’s operating costs, typically property taxes.
- Double net lease (NN): Here, the tenant covers two operating expenses—usually taxes and insurance—along with rent.
- Triple net lease (NNN): In this structure, tenants bear responsibility for rent plus all three major costs—taxes, insurance, and maintenance. Triple net leases are common for long-term leases in retail or warehouse settings, giving tenants more control over the property’s operational costs.
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Partner | Commercial Property, Real Estate, Land Development, Real Estate Finance
Richard Hughes
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Associate | Real Estate, Plot Sales, Residential Property
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Janice Taylor
Conveyancing Executive | Real Estate, Plot Sales, Residential Property
Percentage lease
A percentage lease offers a more dynamic approach, often seen in retail and hospitality spaces like shopping centres or hotels. In this lease, the tenant pays a base rent, along with a percentage of their revenue once a specific threshold, known as the “breakpoint,” is met. This setup allows the tenant to benefit from lower rent during slow periods while enabling landlords to earn more when the tenant’s business flourishes.
This type of lease is particularly advantageous in high-traffic commercial areas, where landlords and tenants both benefit from increased footfall. It creates an incentive for landlords to provide prime business locations, as their rent is directly tied to the tenant’s success.
Variable lease
A variable lease adjusts according to specific conditions and is particularly useful for businesses that anticipate changes in the economic landscape or their own business cycles. There are two primary types of variable leases:
- Index lease: The rent is linked to an index, such as the Consumer Price Index (CPI), which means rent adjusts based on economic factors like inflation or local market rates. For example, in a busy urban centre, rent might fluctuate annually based on the city’s average commercial rents.
- Graduated lease: With a graduated lease, rent increases at predetermined intervals, often annually. This type of lease is common in businesses with seasonal fluctuations, such as tourism-related industries, allowing for higher rent during peak seasons and lower rent during quieter periods.
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What are the most common types of commercial lease?
Gross leases, triple net leases (NNN) and Full Repairing and Insuring (FRI) lease are amongst the most common types of commercial leases.
What is the best type of commercial lease?
The best type of commercial lease depends on your business needs and financial situation. For tenants seeking simplicity, a gross lease offers predictable costs. For those wanting flexibility or control over expenses, net leases or percentage leases may provide greater financial advantages and adaptability.
What is the difference between commercial leases?
Commercial leases vary in terms of financial responsibility and flexibility. Gross leases include all costs in one payment, while net leases shift additional expenses (taxes, insurance, maintenance) to the tenant. Percentage leases tie rent to business revenue, and variable leases adjust rent based on economic factors or predetermined schedules.
Choosing the right commercial lease can have long-lasting implications for both landlords and tenants. It’s vital to weigh the financial and operational impacts and we understand the importance of selecting the right lease structure and are here to guide you through each option, ensuring that your commercial lease suits your business needs or investment strategy.
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