What is a net lease agreement and how does it work?

If you are looking for a commercial space to rent, you may come across different types of lease agreements that define how you and the landlord share the costs and responsibilities of the property. One of these types is a net lease agreement, which can offer you some benefits but also some risks. In this article, you will learn what a net lease agreement is, how it works, and what are the main types and factors to consider before signing one.

1 What is a net lease agreement?

A net lease agreement is a contract between a tenant and a landlord in which the tenant pays a base rent plus some or all of the expenses related to the property, such as taxes, insurance, maintenance, utilities, and repairs. The landlord typically charges a lower base rent than in a gross lease agreement, where the landlord pays for all or most of the expenses. A net lease agreement transfers some of the risk and burden from the landlord to the tenant, who has more control over the property and its costs.

Add your perspective

Snehal S. Patel

Legal Advisory and Litigation | Policy and Compliance | Legal Awareness Outreach Initiatives | Legal Aid
Report contribution
Such kind of agreement is prevalent wherein the actual owner has purchased the property keeping in mind the real estate investment aspect only, wherein the major risk is shifted on to the tenant.

Like

2 How does a net lease agreement work?

A net lease agreement works by specifying how the rent and the expenses are divided between the tenant and the landlord. The rent is usually calculated based on the square footage of the space occupied by the tenant, while the expenses are either fixed or variable depending on the type of net lease agreement. The tenant may pay the expenses directly to the service providers or reimburse the landlord for them. The tenant may also have the option to negotiate some of the terms and conditions of the net lease agreement, such as the duration, the rent increases, the renewal options, and the improvements.

Add your perspective

Snehal S. Patel

Legal Advisory and Litigation | Policy and Compliance | Legal Awareness Outreach Initiatives | Legal Aid
Report contribution
Net Lease Agreement also has types of its own and the basic working of such agreement depends upon the nature of such type of net lease agreement.

Like

3 What are the main types of net lease agreements?

Net lease agreements come in three main types: single net lease, double net lease, and triple net lease. Each one varies in the amount and type of expenses the tenant pays on top of the base rent. A single net lease, also known as a net lease or an N lease, is the simplest and least common type. Here, the tenant pays rent plus property taxes while the landlord covers insurance, maintenance, utilities, and repairs. Double net leases, or net-net leases (NN leases), are more common. The tenant pays rent plus property taxes and insurance while the landlord pays for maintenance, utilities, and repairs. Triple net leases (NNN leases) are the most common and most advantageous for landlords; tenants pay rent plus all expenses related to the property such as taxes, insurance, maintenance, utilities, and repairs. The landlord is only responsible for the structural integrity of the building.

Add your perspective

4 What are the benefits and drawbacks of a net lease agreement?

A net lease agreement can offer both the tenant and the landlord various benefits and drawbacks depending on their goals and preferences. For the tenant, a net lease agreement may provide a lower base rent, more flexibility and autonomy over the property, as well as the potential to deduct some of the expenses from their taxable income. However, it could also bring higher and unpredictable costs, more responsibilities and liabilities, and less protection from the landlord. On the other hand, for the landlord, a net lease agreement could offer a stable and predictable income, less expenses and obligations, and more protection from market fluctuations. Yet, it could also result in a lower return on investment, less control over the property, and difficulty in attracting and retaining tenants.

Add your perspective

5 What are the factors to consider before signing a net lease agreement?

Prior to signing a net lease agreement, you should consider a variety of factors that can influence your decision and negotiation. Firstly, evaluate the market value, demand, competition, and physical state of the property to determine if the rent and expenses are fair. Secondly, choose the type of net lease agreement that best fits your budget, risk tolerance, and expectations. Additionally, examine the length of the lease term, rent escalation clauses, renewal options, and termination clauses. Lastly, read and understand the net lease agreement thoroughly and clarify any doubts or concerns with the landlord or a legal advisor. Furthermore, review the insurance coverage, maintenance standards, improvement allowances, and dispute resolution mechanisms.

Add your perspective

Snehal S. Patel

Legal Advisory and Litigation | Policy and Compliance | Legal Awareness Outreach Initiatives | Legal Aid
Report contribution
One of the main factors to be considered while entering into a net lease agreement is the basic rent which the tenant has to bear apart from the additional costs towards maintenance, taxes, utilities, etc. In addition, prevalent taxes and utilities expenses and maintenance which might increase from time to time have to be considered to have an idea about the total expenditure a tenant will have to bear in comparison to the revenues to be generated from that space.

Like

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

Add your perspective

Dominique Calcò Labbruzzo

Attorney, Arbitrator, HNW Advisor 🌈Keynote 🎤Speaker 🥇Women-In-Law Award Winner 2024 as a innovator & traiblazer 💡holistic law, 🔝20 Inspirational Women 2024 NYCJ
Report contribution
As a holistic lawyer and barrister, my approach centers on addressing the comprehensive needs of my clients in matters of rental law and relocation. This innovative advantage extends beyond the legal aspects, encompassing financial, well-being, and personal development considerations, including "energy check" and "cleaning." This dynamic method provides my clients with a resilient and luxurious response to unforeseen challenges during the relocation process, making their legal and personal journey a more well-rounded and effective counseling experience.

Like

What is a net lease agreement and how does it work?

1

2

3

4

5

6

1 What is a net lease agreement?

2 How does a net lease agreement work?

3 What are the main types of net lease agreements?

4 What are the benefits and drawbacks of a net lease agreement?

5 What are the factors to consider before signing a net lease agreement?

6 Here’s what else to consider

Contract Negotiation

Rate this article

Thanks for your feedback

More articles on Contract Negotiation

More relevant reading

What is a net lease agreement and how does it work?

1

2

3

4

5

6

1 What is a net lease agreement?

2 How does a net lease agreement work?

3 What are the main types of net lease agreements?

4 What are the benefits and drawbacks of a net lease agreement?

5 What are the factors to consider before signing a net lease agreement?

6 Here’s what else to consider

Contract Negotiation

Rate this article

Thanks for your feedback

Explore Other Skills