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When you plan to take commercial property for rent, conducting market research isn't sufficient. Because this massive undertaking entails a significant financial investment, having a firm understanding of the various types of leases is critical.
Earlier leases were permanent, but with changing market conditions and a rise in property rates, the corporate rental agreement changed. Today, leases in India are typically term-based. To understand better, let's dive into the blog and learn about different leases in India.
Commercial Leasing and its Types
Gross Lease
The first type is the "gross lease" which is also known as the "full-service lease." Under this lease category, the landlord is responsible for paying for all the property-related expenses from the tenant's rent. The landlord will be fully accountable for the building and its maintenance, and the role of the tenant will be to focus entirely on business.
When signing a commercial property rental agreement, ensure that you, as a tenant, don't have to be concerned about paying taxes, insurance, or maintenance. The terms of gross lease define the entire expense of leasing the commercial space and the conditions under which the prices may increase.
Merit of Gross Lease
The advantage of a gross lease is that tenants don't have to pay for insurance, taxes, and maintenance. In this type of lease agreement, the total cost of leasing the commercial property is stated under the terms and conditions for which the rent may rise.
Demerit of Gross Lease
The disadvantage of the gross lease is that its rent is higher than that the net lease.
Also Read: Residential vs Commercial property- What's the Difference?
Net Lease
Net lease is where tenants have to pay for space and have a contractual agreement where they have to pay a part of or all of the property's taxes, insurance, and maintenance expenses.
Furthermore, the net lease consists of a single net lease, a double net lease, and a triple net lease.
Single Net Lease
In this type of lease, the tenant must pay the rent and a portion of the property tax. Except for utilities and janitorial services, the landlord handles all the other charges.
Double Net Lease
In this type of lease, the tenant has to pay a share of property tax and insurance along with the base rent. Tenants don't have to bear the cost of structural repairs and maintenance as the landlord will take care of it.
Also Read: Fractional Ownership: Meaning and Its Impact on the Commercial Real Estate World
Triple Net Lease
In this type of lease, the tenant will pay rent and bear the brunt of all additional expenses on a proportionate basis. Triple Net Lease is more landlord-friendly, so one must review the document carefully while signing the office rental agreement.
Merits of Net Leases
If the tenant can manage utilities, they can control the costs. For example, if they want to save on electricity, they can manage their electricity usage. So, tenants only have to pay actual property taxes and maintenance. If no maintenance is required and property tax rates decrease, tenants can save money in the bargain.
Demerits of Net Leases
Among various commercial leases, the disadvantage of having property in a net lease is that the company has to bear unforeseen expenses. Net leases increase the risks for any business.
Modified Gross Lease
The third type of lease is somewhat similar to a gross lease. However, the rent is provided in a lump sum amount, so there is still scope for compromise between the parties. Both the parties can negotiate the expenses, which can be adjusted into the base rental price. This list excludes janitorial services and electricity.
Merits of Modified Gross Lease
Tenants have a higher level of control to cover costs directly related to businesses, including rent, taxes, salaries, etc. They can save money by controlling the usage of utilities and practising more efficient operational methods. Corporations mainly prefer this type of lease to avoid the responsibility of maintaining office buildings.
Demerits of Modified Gross Lease
Landlords who respond slowly to maintenance requests can harm tenants' businesses. The cost may vary from time to time, thus affecting the financial planning of startups or small businesses.
Also Read: Amazing 5 Benefits of Investing in Commercial Real Estate
Each and every commercial estate lease has its pros and cons would be best to decide which lease is best for you based on your budget and business. Make a wise choice!