Make sure you ‘net’ right commercial lease

Commercial landlords and tenants, similar to other parties transacting in a particular business area, have a language all their own when negotiating leases.
Commercial-lease negotiations frequently involve terms like “net” “net-net,” “double-net,” “triple-net,” and “absolute net” as shorthand for discussing who pays for what under the terms of the agreement. Problems arise, however, when a landlord and tenant use the same term and mean two different things.
Even if a commercial landlord and tenant agree in broad terms to a net lease, for example, it is important that the parties’ carefully draft the lease agreement to reflect their actual intent, since these terms can mean different things to different people. Thinking ahead and drafting the lease with precision can avoid future litigation over these issues.
A commercial lease allows a landlord and tenant to allocate who pays for what in several ways. For example, under a gross lease the tenant pays a flat amount as rent, while the landlord pays for all property charges incurred as a result of ownership, including real estate taxes, insurance, and other amounts associated with upkeep and maintenance.
A gross lease is relatively straightforward (as such, it is a popular form of residential apartment lease), and may be sufficient for some commercial deals. The term “gross lease,” however, leaves open the question of who pays for utilities: Some gross leases require the tenant to pay utilities, while others place that burden on the landlord.
In contrast to a gross lease, a “net lease” requires a commercial tenant to pay for some or all additional property charges incurred as a result of ownership. The term “net lease” can refer generally to all types of net leases, regardless of what kinds of additional property charges are paid for by the tenant, or can refer to a specific type of net lease known as a “single-net” lease. Under a single-net lease, the tenant usually pays rent, utilities, and property taxes associated with the property. A commercial landlord and tenant can also agree to a “net-net,” “NN,” or “double-net” lease, which usually means that the tenant also picks up the tab for insurance in addition to paying rent, utilities and property taxes.
Commercial landlords and tenants sometimes refer to single-net and double-net leases collectively as modified gross leases.
The commercial-lease vocabulary does not stop there. Another option is a “net-net-net,” “triple-net,” “NNN” or “fully net” lease, where the tenant generally pays the landlord for all expenses involved in operating the property, including rent, utilities, property taxes, insurance, and fixed and variable upkeep and common-area maintenance charges, though the landlord is still generally responsible for structural repairs.
Under an “absolute triple-net” or “bonded” lease, however, the tenant incurs responsibility for structural repairs as well.
On the opposite end of the spectrum is the “full-service lease.” Under this type of agreement, the tenant writes only one check per month to the landlord that covers all costs and expenses associated with rental of the property at a fixed amount that may increase annually at a predetermined rate over the life of the lease.
A full-service lease allows a commercial tenant to lock in its property-related line item over a period of time but usually comes with added costs to account for the risk borne by the landlord for spikes in prices for utilities, maintenance services, taxes, insurance, or other costs.
Unfortunately, it is not uncommon for landlords and tenants to use and combine these terms imprecisely when negotiating the business terms of a lease. A landlord and tenant may agree that the lease should, for example, be a “net lease, “or “modified gross lease” or “absolute net lease,” without having a meeting of the minds about what they mean. Who pays utilities or insurance? Who pays for common-area maintenance or structural repairs? Parties may become frustrated down the line to discover the lease that they signed may not be the lease they thought they were getting.
To avoid future disputes over who has to pay for what under a lease, commercial landlords and tenants should ensure that their leases contain precise language concerning the various duties and responsibilities to pay, for example, property taxes, insurance, utilities, fixed and variable-upkeep expenses, and common-area maintenance.
It is essential that the parties address these issues at the outset of the lease term because the apportionment of these costs reflects the allocation of risk between the landlord and tenant concerning the likelihood of variability in prices over the term of the lease.
If the parties leave the agreement vague and indefinite on these points, then a commercial landlord and tenant could find themselves enmeshed in protracted litigation. When a court determines that the agreement is ambiguous as to the allocation of costs under the lease, it can allow the parties to introduce evidence that goes beyond the terms of the agreement itself.
The parties may also find themselves wondering why they chose not to save time and expense by ironing out their “net” lease in precise terms from the beginning. &#8226


Christopher R. Blazejewski is an attorney at Sherin and Lodgen LLP, practicing commercial and real estate litigation and business law in Massachusetts and Rhode Island.

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