Legal Guide to Gross Commercial Leases

If you're starting a new business, expanding, or moving locations, you'll likely need to find a space to set up shop. After touring a few places, you settle on the perfect location and you're ready to start talks with the landlord about signing a lease.

For most business owners, the landlord will hand them a gross commercial lease.

What Is a Gross Commercial Lease?

A gross commercial lease is where the tenant pays a single, flat fee to rent a space.

That flat fee usually includes rent and three types of operating expenses:

• property taxes
• insurance, and
• maintenance costs (including utilities).

For more information, read our article on how to negotiate a fair gross commercial lease.

What Are the Advantages and Disadvantages of a Gross Commercial Lease?

There are various pros and cons to using a gross commercial lease for both landlord and tenant.

Advantages and Disadvantages of Gross Commercial Leases for Tenants

There are a few advantages to a gross lease for tenants:

• Rent is easy to foresee and calculate, simplifying your budget.
• You need to keep track of only one fee and one due date.
• The landlord, not you, assumes all the risk and costs for operating expenses, including building repairs and other tenants' uses of the common areas.

But there are some disadvantages for tenants:

• Rent is usually higher in a gross lease than in a net lease (covered below).
• The landlord might overcompensate for operating expenses and you could end up paying more than your fair share.
• Because the landlord is responsible for operating costs, they might make cheap repairs or take a longer time to fix property issues.

Advantages and Disadvantages of Gross Commercial Leases for Landlords

Gross leases have some advantages for landlords:

• The landlord can justify charging a higher rent, which could be far more than the costs the landlord is responsible for, giving the landlord a nice profit.
• The landlord can enforce one annual increase to the rent instead of calculating and communicating to the tenant multiple different expense increases.
• A gross lease might seem attractive to some potential tenants because it provides the tenant with a simple and foreseeable expense.

But there are some disadvantages for landlords:

• The landlord assumes all the risks and costs for operating expenses, and these costs can cut into or eliminate the landlord's profit.
• The landlord has to take on all the responsibility of paying individual bills, making repairs, and calculating costs, which takes time and effort.
• A gross lease might seem unattractive to other potential tenants because the rent is higher.

Gross Leases vs. Net Leases

A gross lease differs from a net lease—the other type of lease businesses encounter for a commercial property. In a net lease, the business pays one fee for rent and additional fees for the three kinds of operating costs.

There are three types of net leases:

• Single net lease: The tenant pays for rent and one operating expense, usually the property taxes.
• Double net lease: The tenant pays for rent and two operating expenses, usually property taxes and insurance.
• Triple net lease: The tenant pays for rent and the three types of operating expenses, usually property taxes, insurance, and maintenance costs.

Triple net leases, the most common type of net lease, are the closest to gross leases. With a gross lease, the tenant pays a single flat fee, whereas with a net lease, the operating expenses are itemized.

For example, suppose Gustavo wants to rent out a space for his fried chicken restaurant and is negotiating with the landlord between a gross lease and a triple net lease. With the gross lease, he'll pay $10,000 every month for rent and the landlord will pay for taxes, insurance, and maintenance, including utilities. With the triple net lease, Gustavo will pay $5,000 in rent, and an additional average of $500 in property taxes, $800 in insurance, and $3,000 in maintenance and utilities per month.

On its face, the gross lease seems like the better deal because the net lease equals out to $9,300 per month on average. But with a net lease, the operating costs can vary—property taxes can be reassessed, insurance premiums can go up, and maintenance costs can rise with inflation or supply shortages. In a year, maintenance expenses could rise to $4,000, and taxes and insurance could each increase by $100 per month. In the long run, Gustavo could end up paying more with a triple net lease than with a gross lease.

Gross Lease With Stops

Many landlords are reluctant to offer a pure gross lease—one where the entire risk of rising operating costs is on the landlord. For example, if the landlord heats the building and the cost of heating oil goes sky high, the tenant will continue to pay the same rent, while the landlord's profit is eaten away by oil bills.

To build in some protection, your landlord might offer a gross lease "with stops," which means that when specified operating costs reach a certain level, you begin to pitch in. Typically, the landlord will name a particular year, called the "base year," against which to measure the rise in costs. (Often, the base year is the first year of your lease.) A gross lease with stops is similar to turning a gross lease into a net lease if certain conditions— heightened operating expenses—are met.

If your landlord proposes a gross lease with stops, understand that your rental obligations will no longer be a simple "X square feet times $Y per square foot" every month. As soon as the stop point—an agreed-upon operating cost—is reached, you'll be responsible for a portion of specified expenses.

For example, suppose Billy Russo leases space from Frank Castle to run a security firm. They have a gross lease with stops where Billy pays $10,000 in rent and Frank pays for most operating expenses. The lease specifies that Billy is responsible for any amount of the monthly electric bill that's more than the stop point, which they agreed would be $500 per month. In January, the electric bill was $400, so Frank, the landlord, paid the entire bill. In February, the electric bill is $600. So, Frank would pay $500 of February's bill, and Billy would pay $100, the difference between the actual bill and the stop point.

If your landlord proposes a gross lease with stops, consider the following points during negotiations.

What Operating Costs Will Be Considered?

Obviously, the landlord will want to include as many operating expenses as they can, from taxes, insurance, and common area maintenance to building security and capital expenses (such as a new roof). The landlord might even include legal costs and expenses associated with leasing other parts of the building. Do your best to keep the list short and, above all, clear.

How Are Added Costs Allocated?

If you're in a multitenant situation, you should determine whether all tenants will contribute to the added operating expense.

Ask whether the charges will be allocated according to:

• the amount of space you rent, or
• your use of the particular service.

For example, if the building-wide heating bills go way up but only one tenant runs the furnace every weekend, will you be expected to pay the added costs in equal measures, even if you're never open for business on the weekends?

Where Is the Stop Point?

The landlord will want you to begin contributing to operating costs as soon as the expenses begin to uncomfortably eat into their profit margin. If the landlord is already making a handsome return on the property (which will happen if the market is tight), they have less need to demand a low stop point. But by the same token, you have less bargaining clout to demand a higher point.

Will the Stop Point Remain the Same During the Life of the Lease?

The idea of a stop point is to relieve the landlord from paying for some—but not all—of the increased operating expenses. As the years pass (and the cost of running the property rises), unless the stop point is fixed, you'll probably pay for an increasing portion of the landlord's costs. To offset these costs, you'll need to negotiate for a periodic upward adjustment of the stop point.

Your ability to press for this adjustment will improve if the landlord has built in some form of rent escalation (a yearly increase in your rent). You can argue that if it's reasonable to increase the rent based on an assumption that operating costs will rise, it's also reasonable to raise the point at which you begin to pay for those costs.

Consulting an Attorney

If you have experience leasing commercial properties and are knowledgeable about the different lease terms, you can probably negotiate your commercial lease yourself. But if you need help determining the best type of lease for your business or negotiating your lease with your landlord, you should talk to a lawyer with commercial lease experience. They can help you clarify your responsibilities as the tenant and make sure you're not paying more than your fair share of expenses.