Everyone has signed a lease at some point in their lives. A basic lease lays out the obligations of the renter and the responsibilities of the landlord. It is a fairly standardized straightforward document, that many of us don’t even read because they are always the same.
These are accurate descriptions of residential leases, but not remotely true of commercial leases. Commercial leases tend to be specifically created for each property they are used for, and the details vary greatly.
There are some basic guidelines about commercial leases that are generally true. Here are the facts you can count on (usually).
What Are Nets?
Nets are the aspects of a lease that one of the parties is responsible for. These typically represent maintenance, insurance, and taxes. The structure is sometimes included in maintenance, but not always.
Triple net leases, also called NNN leases, means that the tenant is responsible for all three nets, maintenance, insurance, and property taxes. Since commercial leases are specific to property, these guidelines could mean something much more or less, depending on where you are and who your landlord is.
While a triple net lease means the tenant is responsible for maintenance, this could mean that you are responsible for anything on the property, including roof and structure. It could mean that you are only responsible for standard maintenance, but the landlord is responsible for major issues with the building or HVAC system.
Double net leases are responsible for taxes and insurance, but not maintenance. Under a single net lease, the tenant is responsible for taxes only.
Why Would Tenants Want Triple Net Leases?
On the surface, triple net leases seem like they are very tilted toward the landlord. The tenant takes all the responsibility, and they get rent every month? This hardly seems fair.
In reality, it has a couple of positive benefits. Insurance companies make money by charging a little more than the total cost of their claims. If you get very sick, this works in your benefit, but for those who don’t get sick at all, the policy equals a net loss.
Landlords who cover all three nets are taking a larger risk. What if insurance rates go up this year due to a claim? What if there is a major failure in the HVAC system, or some other large building repair arises?
Most landlords who cover all of these costs remain profitable by charging for the higher potential expense and hoping for the lower. This means a tenant is paying more total in an average year than they should.
With a triple net lease, the tenant is taking the risk, so they pay dramatically smaller rents. They need to either offset this with a large contingency fund or building insurance riders for large surprise expenses.
The other benefit of triple net leases for the tenant is control. Typically, if you are responsible for all maintenance, that means you have much more control over fixtures and facilities, so you can really make the place your own.
Since triple net leases can mean so many things, it is a good idea to have your business attorney review any lease before you sign it.
One final aspect of triple net leases that is easily forgotten is their negotiability. Unlike residential leases, that are locked in, take it or leave it, most commercial leases can be negotiated, so if you want a 2-year guarantee on the roof, go ahead and ask for it! In summary, a triple net lease is a tool that allows tenants to take greater control of the rental property in exchange for reduced rent.
