Gross, Modified Gross, and Net Commercial Leases: Allocating Expenses and Risks Between Landlords and Tenants

Description

In a volatile commercial real estate market, tenants and landlords alike are concerned with controlling expenses and allocating risk when entering a long-term commercial lease. How operating and occupancy expenses (and, therefore, risk) are allocated between the parties is governed by the lease structure: whether a gross, modified gross, or net lease. Counsel should be aware of the differences between the lease structures so they can best advise their clients.

In a gross lease, the tenant pays a single monthly rent payment while the landlord typically assumes all operating expenses, taking the risk that they have calculated sufficient rent amounts to cover return on investment as well as required repairs to the building or common areas and other variable expenses. A net lease requires the tenant to pay or contribute to the operating expenses and assume more risk, which usually results in a lower rent payment to the landlord. A modified gross lease is a hybrid version of the two in which both parties assume responsibility for certain expenses that vary depending on what is negotiated. This structure offers more flexibility to the parties and limitations can be negotiated into this structure to counter unpredictable expenses.

In addition to understanding how expenses are allocated based on the lease structure, consideration should be given to what constitutes occupancy and operating expenses so that these, as well as the responsible party, are clearly defined in the lease.

Listen as our expert panel discusses unique terms and considerations for each lease structure as well as how expenses are allocated in each. The panel will describe the risks and benefits to landlords and tenants for each structure and advise on best practices for negotiation and drafting.