Entrepreneurs and commercial leases: Net or full service?

Commercial leases are complex arrangements. A single provision can result in unforeseen expenses that could cripple a business.

Starting a business is an exciting and risky endeavor. Those who choose to go out on their own have a number of legal issues to navigate to help make their dream idea translate into a successful business enterprise.

One issue involves finding the right location and building space for your business.

What types of commercial leases should an entrepreneur consider?

First, it is important to note that a commercial lease is not as simple to navigate as a traditional residential lease. In addition to the basic landlord/tenant relationship, the entrepreneur must also navigate various forms of leases. Unlike residential leases, commercial leases come in many different types. These leases are often broken into two types: the full service lease and the net leases. The tenant is responsible for various costs depending on which lease is used.

What is the difference between full service leases and net leases?

The full service lease is also referred to as the modified gross lease. This lease is commonly used in buildings with multiple tenants. Although it generally results in the tenant paying a flat fee every month, the calculation used to determine the lease amount is often complex and can include consideration of various potential costs. In what can be seen as either a benefit or risk to these leases, the rent generally does not change. This means the rent does not go up if operating expenses increase, but it also does not decrease if operating expenses go down.

In contrast, the entrepreneur may also consider getting one of the many types of net leases that are available. There are three different options: the net lease, the double net lease and the triple net lease. This set of leases can adjust with operating expenses.

In a net lease, the entrepreneur is responsible for the cost of utilities and property tax. The landlord generally covers costs that result from any needed maintenance, repairs or insurance. A double net lease requires the tenant cover the costs for utilities, property taxes and insurance premiums while the landlord picks up any costs that are required for maintenance and repairs. A triple net lease leaves the tenant responsible for all costs. However, the landlord is generally liable if the building needs any structural repairs.

Should I get a lawyer?

It is wise to seek legal counsel before signing on to a commercial lease. These agreements are complex and a single provision can have a big impact on your bottom line. Take the standard gross lease. Although the rent generally does not change a landlord may have a lease that includes a provision that allows for an increase in rent if the expenses exceed a certain cost. This is referred to as an escalation clause. An attorney can carefully review the contract and bring your attention to any provisions, like the escalation clause, that could impact your business interests, reducing the risk of any surprises with the lease agreement.

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