Lease Terms: Types and What is Included

Lease terms are vital to understand and negotiate with future tenants. Offering the wrong types of leases or lease terms can obligate you to meet responsibilities you didn’t originally intend to handle. The right lease terms can also protect your legal rights and foster a positive relationship between you and commercial renters.

In this article, we cover everything a commercial landlord would want to know about lease terms and how they affect your commercial lease agreements :

What are Lease Terms?

Lease terms are the contract terms of a lease agreement between a lessee, usually the tenant, and a lessor, typically the landlord. The legal contract includes lease terms to establish the period of time by which the lease will last, contractual obligations, and more.

What’s Included in Normal Lease Terms?

It’s essential to approach commercial lease negotiations with a firm grasp of the meaning of your terms. Standard commercial lease clauses include vital and anticipated conditions. Not including them could signal to prospective tenants that your office or building space may not be the right legal fit for them.

Commercial landlords typically include the following terms in a normal lease:

• Parties. Identify the parties correctly since incorrect identification can result in severe legal headaches should a dispute arise later. Make sure to correctly identify the parties who might need to be held to the terms of the lease later. For example, listing someone’s name has a much different impact than using their LLC. If you accidentally sign a lease with a person when you intended to sign it with their business, it could be harder to collect on defaulted rent in some situations.
• Premises. The premises clause identifies the property that the lessee will rent. If you’re leasing an entire commercial building, you can insert the street address and building name. On the other hand, renting office space requires landlords to be more specific when describing what rent includes, such as suite number, amenities access, and more.
• Use. A use clause establishes the parameters for what activities you will allow in the rented space. The restrictions can be as broad or as specific as you prefer. In general, you should avoid placing severe restrictions on your use of the rented space since it could deter well-qualified tenants who want flexibility in how they use the space.
• Term Length. The term length clause details the duration of the lease and termination dates. According to Business News Daily, the average commercial lease term lasts three to five years. A lease term can be either fixed (for a specific duration) or periodic (renewed automatically at the end of each period).
• Rent. Monthly rent is critical to negotiating with prospective tenants before drafting the lease agreement. Carefully draft the lease clauses to determine to account for security deposits, utilities, office rent, and more.
• Modifications. A significant portion of your lease should address this topic if a tenant needs space modifications. You and the lessee will need to agree on designers, work performances, project completions, and obligations.
• Amenities. Amenities clauses in the lease are likely to address practical arrangements you have with your tenants, such as parking and business signs. While negotiating these terms, you and the tenant attempt to integrate your business needs seamlessly. When executed well, these amenities will add to the success and convenience of a tenancy for both parties.
• Insurance. Insurance products are available to help tenants pay for the risks associated with commercial leasing, including liability insurance or property insurance, should an unanticipated issue arise. You’ll need to consider which types of insurance are appropriate for your target tenancies so that you have the correct terms prepared in your commercial leases.

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Types of Commercial Leases

The types of commercial leases you offer tenants significantly impact your future responsibilities. There are several distinct types of commercial leases. Understanding how each one works will empower you to make informed decisions about potential arrangements

Types of commercial lease agreements include:

• Single Net (N) Leases. Single net (N) leases, or net lease, require tenants to pay some or all of the property taxes, while the landlord is responsible for property insurance and maintenance. A landlord might use this agreement to save money on property taxes or ensure they can pay property taxes on time. Apart from this advantage, the landlord receives few benefits and remains responsible for most of the building’s operations.
• Double Net (NN) Leases. Double net (NNN) leases are used when the tenant is responsible for some or all property taxes and insurance. The landlord is responsible for all maintenance and repair costs, like in a single-net lease. This option is a more common type of commercial lease in multi-tenant buildings.
• Triple Net (NNN) Leases. Triple net (NNN) leases are when the tenant pays for all or some property taxes, insurance, and maintenance. This type of lease offers landlords several advantages, including remaining more “hands-off,” which allows for more freedom. However, it’s essential to remember that base rents will be much lower to offset the tenant’s obligations.
• Absolute NNN Leases. NNN absolute leases are the opposite of a gross lease, which include all expenses. Under the absolute NNN lease, the tenant is responsible for all property costs and assumes all possible risks under this arrangement. This type is the least common of commercial leases, as few tenants are willing to assume such a high level of risk. While this lease effectively allows them to own a building without purchasing it, they bear all the risk and do not benefit from the property’s appreciation in value.

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Gross Lease vs. Net Lease

Gross leases are full-service leases since tenants pay a share of expenses proportionate to the building. In contrast, a net lease requires the tenant to pay rent and other costs associated with owning, operating, and maintaining the property.

Let’s take a closer look at gross leases vs. net leases separately for a better understanding of the differences:

What Is a Gross Lease?

Gross leases are ones in which the tenant pays a flat fee for their rent. Landlords may account for incidental tenant expenses, such as property taxes, insurance, and utilities, by building them into the rent amount. A gross lease is great for commercial office leases.

What Is a Net Lease?

Net leases are lease agreements in which the tenant pays a portion or all of the property’s taxes, insurance, or maintenance costs in addition to the base rent. Because the tenant pays directly for some of these expenses, the amount they pay may vary from month to month. Net leases are popular in commercial lease agreements for entire building office leases since they make management more automated while still benefiting from property ownership.

Other Terms to Know in Commercial Leases

Another essential term to understand is the idea of lease vs. rent since the two terms are very different. The primary difference is the term period they cover. Lease agreements tend to last in 12-month periods for up to five or ten years. Rental agreements are much shorter and typically last only thirty days.

It is also worth noting that residential lease agreements typically use the term rent. It is perfectly acceptable to create a rental agreement in this situation. You can refer to your document as a lease agreement for commercial tenants, regardless of the period offered.

Get Legal Help with Lease Terms

If your business needs legal help with lease terms, work with commercial lease lawyers to offer legal advice on how to negotiate a commercial lease and finalize the proper documents. Connect with a legal professional for commercial lease help in your state today.

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