Net or Gross? Santa Clara Real Estate Lawyer Talks the Complexities of Commercial Leases

By the time most people reach adulthood, they have experienced leasing property.  Whether it’s a house, an apartment, or just a room in a shared home, leasing a living space is a common experience.

Leasing a business property, however, is very different from leasing a residential property.  A lot of the terms of a residential lease are actually set by statute, but many of those statutes do not apply to commercial leases.  This is why a commercial lease is usually much longer and more complicated.  There are just a lot more decisions to make.

One area that creates a lot of confusion is the difference between gross and net leases.  At the most basic level, a gross lease is one in which (like most residential leases) the stated rent amount is generally all you pay to the landlord.  Whereas a net lease is one where you pay not only the stated amount, but also some additional expenses.

Most typically, net leases are seen in the form of a “NNN Lease,” usually referred to as triple-net.  Traditionally, the three “nets” are property taxes, insurance, and maintenance.

How does this work?  Well, suppose you have a NNN lease at $1,000 per month.  Every month, you send your landlord a check for $1,000,plus an estimated amount to cover that month’s taxes, insurance, and maintenance.  Typically, the landlord will then reconcile the estimated charges against the actual charges periodically (usually once a year), and either bill for or refund the difference.

But keep in mind that this is only one typical scenario.  You need to carefully read (and negotiate) the terms of your commercial lease to see exactly which expenses are being passed through and when, and what the procedures are.

If you think a gross lease is easier or cheaper, think again.  You still need to examine the lease carefully to see which items are the tenant’s responsibility and which are the landlord’s.  And, as you might expect, a landlord is likely to have a higher rent under a gross lease, since there are more expenses for the landlord to cover.  Depending on how they’re drafted, a net or gross lease can come out very similar, or radically different.

The bottom line is, no matter how your commercial lease is labeled, there’s no substitute for a careful reading of it.