Understanding commercial leases: key things to know

Leasing commercial property is a tricky and crucial part of the business. If you're looking for an office or a landlord looking to rent out your space, you need to know the different types of leases and their financial responsibilities.

In this guide, we'll explore the three basic forms of commercial leases - gross, net, and triple net - and help you make an informed decision about which type is most appropriate for your needs.

Is commercial leasing worth it?

Commercial leasing can be a compelling choice for firms seeking to rent or purchase commercial space for various objectives. This space can include retail stores, offices, industrial buildings, and other structures. 

It is a great option for companies looking to establish a physical presence without buying real estate. It is important to note that the Consumer Protection Act (CPA) does not apply to all leasing agreements. As a result of the CPA, landlords and tenants have a different legal relationship regarding leases.

Types of leases in the commercial industry

The types of commercial leases differ, each with specific terms and features. Here are some interesting things to know:

Gross lease

A gross lease is the most straightforward type of commercial lease. In this arrangement, the tenant pays a fixed rent, while the landlord covers most of the property's expenses, including maintenance, utilities, insurance, and property taxes. 

As the fixed rent eliminates the risk of unexpected charges, this lease type is especially attractive to tenants looking for predictability in their monthly expenses.

Pros:

• Predictability: Budgeting is easier with a consistent monthly rent.
• Simplicity: The landlord handles most property-related expenses, so you do not need to worry about fluctuating costs.
• Ease of management: As a landlord, gross leases simplify accounting and management since they control all expenses.

Cons:

• Expensive: Landlords often set higher rents to cover potential fluctuations in property expenses, which can make gross leases more expensive for tenants.
• Less control: You get little to no control over how the property is maintained, potentially leading to dissatisfaction if the landlord's standards differ from the tenants'.

Considerations before choosing it:

One important consideration is utility usage. Landlords generally consider the amount of utility consumption by tenants when setting rent rates. If tenants exhibit high levels of utility usage, landlords may increase the rent to cover these additional costs.

Net lease

You are more involved in net lease agreements than in gross leases. As a tenant, you will pay a fixed rent and a proportional share of the property's operational costs. In this arrangement, the landlord will cover the building's common area maintenance, operational costs, taxes, and insurance.

Pros:

• Lower base rent: Net leases typically offer lower base rents since you share property expenses.
• Transparency: You gain more insight into property costs, which gives a better understanding of what they are paying for.
• Potential savings: Substantial savings can be achieved if you manage your portion of the expenses efficiently.

Cons:

• Costs: Monthly expenses can fluctuate, making budgeting more challenging as a tenant.
• Maintenance responsibility: You're responsible for maintaining the property, which can be burdensome, especially for small businesses.

Considerations before choosing it:

You should ask for thorough expense projections to evaluate possible costs fairly. Negotiating a cap on maintenance expenditures also shields you from outrageous repair bills. Keeping these factors in mind will help you make wise decisions and ensure that your financial situation is safeguarded.

Triple net lease (NNN)

You bear most of the property's expenses in a triple net lease (NNN). This form of lease obligates you to pay more than just the rent; you must also pay any and all maintenance fees and other expenses directly related to the property. Expenses like taxes and insurance can be considered. 

Pros:

• Lower base rent: It often features the lowest base rents, making them attractive to tenants seeking lower initial costs.
• Property control: You have greater control over property maintenance and can ensure it meets their standards.
• Investment potential: For landlords, NNN leases provide a stable income stream with minimal management responsibilities, making them appealing investments.

Cons:

• High responsibility: Smaller businesses may need help to handle all property expenses.
• Fluctuating costs: Property taxes, insurance premiums, and maintenance costs can vary, complicating budgeting.
• Capital expenditure: You may face significant expenses for major repairs or upgrades.

Considerations before choosing it:

Unlike other types of leases, you're responsible for their rent and various additional costs associated with the property. Therefore, landlords usually prefer NNN leases because they reduce the possibility of losing money on maintenance.

Termination of lease

Terminating a commercial lease in South Africa carries various legal questions and issues. Ground for termination could include contract breach, notification, or mutual agreement. 

Tenants have certain responsibilities, including specified notice times. Ignoring the proper process could lead to court proceedings demanding tenants pay the remaining rent for the lease term and surrender the premises.

Invest in the right property for your business

You can minimise risks, it is recommended that you seek the advice of a property lawyer and ensure that lease documentation is clear. First, it is essential to decide what type of business lease you need based on your operational needs.

Visit our listings at Newpoint Property or get in touch with our property professionals to view the options for leased properties that are now available.