When your company is looking for a property to lease, you may encounter a type of lease known as a triple net lease. Triple net leases are a popular lease structure in commercial leases of freestanding buildings, yet companies should carefully consider entering into these agreements, as there are particular risks associated with triple net leases. Most notably, they can require you to take on unexpectedly high liabilities. If you are considering renting a property through a triple net lease, you should make sure to have an experienced real estate lawyer review the contract before signing. Through Priori, you can connect with a top real estate lawyer who can evaluate and negotiate your triple net lease.
What Is A Triple Net Lease?
Triple net leases (also known as triple-N leases, NNN leases, and even "hell or high water leases”) require the tenant to be solely responsible for all of the costs of the property being leased in addition to the rent. This places a great deal of the property liability on the tenant using the property rather than the landlord renting it out.
Tenants and Triple Net Leases
Triple net leases are named that way because they require the tenant to cover three net costs in addition to rent, utilities, and other costs generally assumed by the renter under standard property lease agreements. Under triple net leases, tenants are responsible for the following three nets or costs:
- Property Insurance. Tenants must pay to carry insurance on the commercial property. Additionally, they usually must pay any deductibles on the policy when a payout is made. The tenant is similarly generally responsible for covering any uninsured damage done to the property.
- Real Estate Taxes. The tenant must pay for its portion of property taxes. This can mean huge unexpected jumps in fees for the renter if the property is appraised at a higher value than expected.
- Maintenance. The tenant is responsible for any repairs and general maintenance costs associated with the asset, including everything from cleaning and standard wear and tear to repairing damage associated with catastrophic events or accidents.
Benefits and Risks of Triple Net Leases for Tenants
Because of the potentially high costs of insurance and maintenance, the rent for triple net leases is generally very low in comparison with similar properties rented under other types of leases. Sometimes, this lower rent is worth the additional costs, especially if a building is newer and requires little maintenance. The risk of triple net leases, of course, is that companies stuck in triple net leases can find themselves responsible for high unexpected insurance premium increases, maintenance needs, and tax burdens with no recourse to recover these costs or terminate the lease until the term is completed. It is important to note, however, that triple net leases are fairly common and essentially unavoidable when dealing with certain types of commercial real estate properties, so businesses may find themselves without other options.
Benefits and Risks of Triple Net Leases for Landlords
Obviously, landlords benefit from triple net leases because their operating costs are much lower. However, they can still face unexpected expenses and even legal penalties if tenants do not pay the costs required under the triple net lease. If a tenant neglects maintenance to cut costs, landlords can find themselves with an asset in deteriorated condition or can lose money conducting major repairs after a lease ends. Similarly, if a tenant goes bankrupt, the landlord is held responsible for any damage done to the property not covered by insurance (or if payment has lapsed, all damage), as well as the tax burden. In addition, high net costs in any of these categories can make property unappealing to commercial tenants, leaving it vacant and costing the landlord money.
Drafting Triple Net Leases
Because of the nature of triple net leases, these contracts must be drafted incredibly carefully in order to ensure that there are no hidden liabilities for either party. While all leases should be reviewed thoroughly before agreeing to the terms, this is especially true for triple net leases so that responsibilities, warranties, and other aspects of the relationship are clearly established. To do this, every triple net lease must be vetted by a skilled real estate lawyer.
The cost of triple net leases can vary based on a number of factors. Priori attorneys typically create flat-rate packages for leases that range from $375 to $2275. In order to get a better sense of cost for your particular situation, put in a request to schedule a complimentary consultation and receive a free price quote from one of our lawyers.
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What are “grossing up” provisions in triple net leases?
When you rent out only a part of a property with an triple net lease (such as a single floor in an office building), you are generally only responsible for the proportion of the fixed cost that would be allocated to your share of the property. For example, if you rent one floor of a 10-floor building, you would be responsible for 1/10th of the property tax. Operating maintenance costs, however, are usually subject to grossing up provisions.
Grossing up provisions allocate your share of the cost based on the assumption that the building is fully occupied and that everyone contributes an equal cost. For example, if janitorial staff is paid to clean your floor at night and it costs $100,000 a year, you wouldn’t just pay 1/10th of that cost if all the other floors were unoccupied. It would be “grossed up” to assume that each floor required the same janitorial costs of $100,000 for a total of $1,000,000, making your share of the burden $100,000.
What’s the difference between single-, double-, and triple-net leases?
A triple net lease requires the tenant to pay for insurance, property taxes, and maintenance on a property. A double-net lease simply requires the tenant to pay for two of these three costs, and a single-net lease requires the tenant to pay only one of these costs. A gross lease, on the other hand, requires the landlord to pay all three of these for the property.