Commercial Leases: Gross vs. Net

There are two general types of leases that you may encounter when leasing commercial property. One type of lease is generally referred to as a gross lease. The other type is generally referred to as a net lease.

When the phrase “gross lease” is used, that phrase generally refers to a lease in which the tenant pays a fixed amount each and every month for occupancy, and the landlord receives that fixed amount. Under a gross lease, a tenant knows the fixed expense and a landlord knows the total amount it will be receiving. However, risk of increases in expenses for maintenance and operation of the leased premises, together with tax and insurance increases, reside with the landlord in a gross lease.

Conversely, under a “net lease,” the tenant pays not only a fixed amount for possession of the leased premises, but also an additional amount for the payment of common area maintenance charges, taxes, and insurance for the leased premises. (These charges are often referred to as CAM charges.)  Therefore, under a net lease, the risk of increased costs for operations and maintenance, insurance, and taxes resides with the tenant, rather than the landlord.

You will often encounter a gross lease in space that is referred to as Class B or Class C space. You would more often encounter a net lease in space referred to as Class A space. The rationale for this is quite simple:  The more desirable the premises, the more likely the landlord is to attempt to shift the risk for variable costs to the tenant. Also, certain areas use gross leases historically, and other areas have historically used net leases. So, you could have a net lease or gross lease situation depending upon either of the relative negotiating power of the parties (based upon the desirability or demand for the leased space), or for historical reasons.

If you’re entering into lease negotiations, whether as a landlord tenant, or you are considering the lease of property, it is always advisable to contact an experienced real estate attorney to guide you through the process.  For more information regarding leasing of real estate, please contact of the Demorest Law Firm.