COMMERCIAL LEASES AND TRANSACTIONS
As a business owner, you understand only too well the complexities which can occur during any commercial transaction. Leases and transactions involving commercial properties must be handled properly in order to ensure that you have correctly anticipated as many potential issues as possible that could arise during the term of the lease or after a purchase or sale.
Commercial leases are vastly different from the typical residential lease. Commercial leases often involve a longer lease term and thousands of square feet. Business entities normally pursue lease option years to give them more comfort as to continuity, which often also appeals to property owners and managers.
There are three basic types of commercial real estate leases. A “gross” lease typically means a tenant pays one lump sum for rent, from which the landlord pays its expenses. The “net” lease has a lower base rent since some expenses such as utilities are paid directly by the tenant. Lastly, there are hybrid leases which include aspects of both gross and net leases.
In a gross lease, the rent includes all property-related expenses such as common area maintenance (CAM), property insurance and property taxes which are paid by landlord. The tenant insures its personal property and business.
In a net lease, the tenant pays a lower base rent since tenants also typically pay a portion of common area maintenance (CAM) costs according to their square footage. In addition to CAM (i.e., landscaping, trash collection, elevators, parking lots, fire suppression) tenants often are responsible for property insurance, property management fees, and the maintenance of any commonly shared area or service.
There are several types of net leases:
Single Net Lease
Under a single net lease, tenant typically pays a base rent plus a pro-rata share of the building's property taxes and CAM. Landlord pays all other building expenses and maintains the roof and structure of the building(s).
Double Net Lease
Tenant typically is responsible for base rent plus a pro-rata share of property taxes and property insurance. The landlord is responsible for CAM and structural repairs.
Triple Net Lease
Under a triple net lease, tenant pays its pro rata share of property taxes, insurance, and CAM in addition to its base rent.
Triple net leases are favored by landlords, since most if not all carrying costs of the building are passed on to tenants. There are benefits to tenants as well. The base rent is lower, and any cost savings in operating expenses benefit tenants rather than the landlord.
Absolute Triple Net Lease
An absolute triple net lease is often used when tenant occupies the entire property and has a right of first offer or other option to purchase the property. Tenants under this type of lease assume all risks of loss such as property damage (fire, water and storm damage), theft, partial or complete destruction, and taking by eminent domain.
When drafting and executing a commercial lease, great consideration must be given to
The term of the lease and any options or right to purchase
Early termination option for the landlord or tenant
Limitations on space or modifications
Limitations on assignment and subleases
Personal liability provisions and Guaranties
Default, Eviction, Possession
Attorney Fees and Costs in the event of a dispute or default
We have assisted property owners, landlords, tenants and purchasers with commercial real estate leases for over 25 years. Due diligence should be undertaken before entering into any lease since the monies involved are significant and the terms normally in excess of 5 years. If you have any questions regarding commercial leases or real estate transactions, do not hesitate to contact us. Our office handles commercial real estate transactions for landlords, tenants, buyers and sellers in Pennsylvania, New Jersey, and across the country.