If you are a commercial landlord, you may have agreed to enter into a modified gross lease with your tenants. Modified gross leases combine certain aspects of both net leases and gross leases. Modified gross leases must be carefully executed so that each party understands their responsibilities.
Net leases versus gross leases
In a net lease, the commercial tenant pays all property expenses in addition to rent. A net lease is common in single-tenant buildings. A gross lease, on the other hand, is one in which you as the commercial landlord take on all operating expenses. Rent is calculated with these expenses in mind.
Modified gross leases
Modified gross leases are a hybrid of gross leases and net leases. In a modified gross lease, tenants pay base rent, but also take on a proportion of other property expenses. Some of these expenses may include taxes, utilities, insurance and upkeep.
Modified gross leases are common in commercial spaces that house more than one tenant. For example, if the entire building has a single electric meter, the monthly electric bill may be split between tenants in proportion to their square footage of the building.
Thorough execution is critical
It is important to note that most modified gross leases are negotiated between you and your commercial tenants, so it is important to completely define what expenses the tenant will be responsible for and which expenses you will pay. Ultimately, a modified gross lease can benefit both landlords and tenants, as long as each party knows exactly what their responsibilities are and take care to uphold them.