Businesses and retail stores in the state of Maryland are typically required to sign a commercial lease before moving into a commercial location to conduct business. Before executing a commercial lease, however, business owners and managers are encouraged to fully understand the seriousness of the commitment created when executing a commercial contract.
Commercial leases are legally enforceable contracts, with terms that typically last at least five years. The fact that the provisions within a commercial lease are legally enforceable makes it essential for business owners or managers to understand the risks associated with commercial leases. Attorneys who specialized in commercial leases can, for example –
- Help ensure if intended business operations meet zoning requirements
- Determine through a title search if the landlord or the building has existing building code violations or other pending legal claims.
Commercial leases are the written documentation that delineates the allowances, limitations, and costs for a tenant during the lease term. Important items and issues generally discussed and detailed in commercial leases include rent and the business’ rights and limitations, which may impact the company’s options to grow or expand.
There are three types of commercial leases in Maryland. Each type of commercial lease has specific guidelines, although most leases can be revised with addenda to meet unique situations.
When a better understanding of available commercial leases, it’s easier to decide which of these commercials best fits the business’s particular needs. Business owners must be cautious regarding the key provisions when evaluating a potential commercial lease. These include, but are not limited to –
- Security Deposit Requirements
- Lease Term Details – when is rent payable? – at lease signing? Or when operations begin?
- Rental Increases – when and how are rental adjustments calculated
- Allowances for Alterations and Improvements Required to Optimize Business Operations
- Lease Renewal Opportunities, and Requirements to End Lease
- Early Lease Termination Options
- Parking Allowances for commercial and non-commercial vehicles
- Permitted Signage
- Dispute Resolution Protocols, to name a few
Types Of Commercial Real Estate Leases
Gross Lease or Full-Service Lease
A gross lease is the type of lease where a tenant’s rental payment is considered all-inclusive. In other words, with a full-service or gross lease, it is the landlord’s responsibility to cover the property’s expenses – which includes maintenance, insurance premiums, and real estate taxes (and other expenses) – with monies collected from the building’s tenants.
A gross lease can be beneficial for tenants as it represents the only fixed cost of the business’ lease expenses, which makes budgeting easy, especially for new companies. The gross lease also allows a business to stay far-removed from the landlord’s day-to-day operations and creates opportunity and time to dedicate to the business’s operation and growth.
Tenants should make sure they understand the scheduling and extent of janitorial services included in their gross lease rent, or if there are any provisions that chargeback tenants for excess utility consumption levels. These are the areas where Maryland based commercial-lease attorneys are valuable.
The net lease is a type of commercial lease that offers excellent flexibility. When compared to a gross lease rental amount, the net lease base rent will always be lower. In a net lease, the tenant is responsible for paying for their business’s proportionate share of the customary expenses in the operation of the building in which the business leases.
There are several net lease varieties –
- A Single Net Lease – Within a typical single net lease, a tenant pays a predetermined single base rent plus a pro-rata share of the property real estate taxes and utilities. Each tenant’s tax and utility liability is based on the leased space’s overall percentage of total space. In a single net lease, the landlord is responsible for paying all repairs and maintenance, but the tenant typically pays for janitorial services.
- A Double Net (NN) Lease – In a double net lease, the tenant must pay an agreed-upon base rent plus their business’ share of the insurance premiums, utilities, and property taxes based on the leased space’s overall percentage of total space. In a double net lease, the landlord maintains responsibility for structural repairs, but the tenant typically pays for janitorial services.
- A Triple Net (NNN) Lease – The triple net lease is generally the most common for retail space and free-standing structures. The NNN lease is responsible for base rent, plus the proportionate share requires insurance, taxes, and CAMS (Common Area Maintenance). The triple net lease is most advantageous to landlords as the tenant is responsible for most of their business’s expenses, including insurance, janitorial services, and utilities. Tenants are cautioned to understand how the rental increase caps are structured before executing a triple net lease.
- An Absolute Triple Net Lease – An absolute triple net lease is not a common option because this type of commercial lease requires the tenant to be entirely responsible for all expenses on the building. Tenants may wish to purchase property since the costs would be similar; however, monthly payments would reduce a mortgage balance and potentially offer an appreciation of the property in the future.
Modified Gross Lease or Modified Net Lease
The net lease is more landlord-friendly, whereas the gross lease is more tenant-friendly. The Modified Gross Lease is a happy middle ground for both parties to the commercial lease contract. Tenants find it is more flexible and an easier commercial lease to negotiate for both landlord and tenant. A Modified Gross Lease also opens a wide variety of potential negotiations for tenants and landlords.