When looking at real estate rental agreements you will probably come across two common kinds of commercial leases: net leases vs gross leases. This Business Kitz article will compare net leases vs gross leases and assist in building your understanding of them.
What is a net lease?
When renting a commercial property the tenant will pay a base rent (also called net rent) to the landlord for renting the property. A net lease is set apart by the fact that other fixed fees, or outgoing expenses that are part of the main bill, are included in addition to your base rent payment. These fees can include:
- Land tax;
- Council rates;
- Water rates;
- Management fees; and
- Strata levies.
This means that the tenant is effectively contributing to some or all of the outgoing expenses for the property. Net leases benefit the landlord as the tenants are paying for the outgoing expenses to maintain the property.
What are the pros and cons of a net lease?
If you are a business owner who has purchased on a commercial property with a net lease to headquarter your operations in, you are likely to experience financial benefit as the contribution to maintaining the property is entirely or partly passed onto the tenant depending on the lease agreement.
Notwithstanding, if you are a tenant, you are likely to experience the detriment of additional fees in the form of fixed outgoing expenses, as they will be added onto your base rent to maintain the property. This is especially unfavourable to you since you do not own the property. Additionally, these fixed costs are added to your operating costs which may drive down profits for your business.
What is a gross lease?
Unlike a net lease, the gross lease doesn’t obligate the tenant to contribute to the outgoing expenses for the property. This means that tenants only contribute through the base rent payments or any incidental charges that they incur.
The key difference between the net lease and gross lease is the expenses that landlords pass onto the tenant. Unlike outgoing expenses, incidental charges are expenses that the tenant incurs in addition to the base rent for using the property.
For example, if a tenant requests more forms of utilities or services, they would incur these expenses in their gross rent. Gross rent is especially helpful for businesses who want to budget their expenses to reduce variable costs and maximise profit.
Using the previous example, if your business would like to utilise more cleaning services in your office space, your landlord may accept that request and add on the incidental cleaning expenses to your base rent, as one gross lease payment.
A net lease differs from a gross lease due to the expenses that are passed on to the tenant, in addition to their base rent payments. Net leases include outgoing expenses that maintain the property, such as taxes, insurance, and management fees, whereas, gross lease can include incidental expenses, such as utilities and services, which are dependent on the agreement. If you need any assistance with net or gross leases, our Business Kitz business specialists and sister company Legal Kitz can both help. Book a FREE consultation now!