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Outside Consultant: How Do Commercial Leases Vary From Residential Leases?

Commercial leases start from different assumptions then residential leases. The law ensures safe conditions for people who rent living space for themselves and their families. Residential landlords must follow detailed rules to lawfully evict a tenant. These laws protect consumers from unethical landlords.

Commercial leases presume that both parties are businesses. The law does not provide as many protections for businesses. It assumes that businesspeople have the experience needed to guard their interests, even though new business owners may misunderstand how commercial leases work.

Different assumptions apply to business leases. Many spaces, such as malls or office buildings, contain common spaces. Commercial tenants may be responsible to pay a prorated amount for common area maintenance or operating expenses. These fees can be substantial.

Businesses have several rent options. A gross lease is most like a residential lease, with the tenant paying a set monthly rent amount. A modified gross lease is similar, but sets aside some monthly expenses for direct payment by the tenant. The direct payments might be property taxes, utilities, maintenance charges or other responsibilities. Unlike residential leases, gross leases may incorporate rent increases if, for instance, the consumer price index changes.

Net leases are very unlike residential leases. There are many types of net leases, with each allocating responsibilities and costs between the landlord and the commercial tenant. A triple-net lease places almost all non-rent expenses on the tenant. The landlord remains responsible for building repairs, but the tenant pays insurance, taxes, utilities and common area maintenance. The tenant is also responsible for any modifications to the space, such as installing displays or machinery. Many landlords prefer absolute net leases, which remove all or almost all responsibilities from the landlord; the commercial tenant is completely responsible for the property. This model gives the landlord a passive income stream, and maximizes tenant control (and risk). Prospective tenants should research further types of net leases.

Leases for retail space may include percentage rent. Under these terms, landlords receive a set portion of the tenant’s gross receipts. Parties should ensure that “gross” is carefully defined in the lease to avoid disputes about the amount owed. Clarity is vital for a successful landlord-tenant relationship.

Susan Supina is a member of the Ethics and Business Law faculty of the University of St. Thomas Opus College of Business.