commercial real estate lease

What is Base Rent in a Commercial Real Estate Lease?

Base rent, (may also be referred to as net rent) is the base lease rate a tenant pays for a commercial, industrial, or office space in a building. The base rent is net of expenses and percentage rents. What this means is that the base rent is not a representation of the total monthly rent a tenant will pay. Confusing? Possibly if you’re new to it.

As mentioned above, base rent is net of other expenses such as utilities, property tax, property maintenance, and property management etc... In commercial real estate leases it’s common practice for the tenant to pay for their share of other property expenses through additional rent commonly referred to as TMI. That means in order to see the whole picture of what your monthly rent will be you need to combine the base rent and additional rent. If you’re still confused I have another blog that explains how to calculate the total monthly rent here.

If anyone is confused over the rent structure in my listings I’m happy to provide clarification.

What is the difference between a Gross and Triple Net Lease in Commercial Real estate?

If the pricing for commercial real estate isn’t confusing enough for businesses looking to lease space for the first time, wait until you find out there is more than one type of lease you can sign, but that’s usually decided by the landlord.

The majority of the time commercial real estate landlord’s prefer to operate with some form of triple net or net lease (covered in another blog) which requires the tenant to pay for property expenses in addition to their base rental rate. A gross lease is probably more familiar to tenant’s approaching this for the first time, but don’t expect a landlord to use this type of lease. A gross lease is usually a monthly flat rate that not only includes the base rent but some or all of the property expenses as well. This is an easier option for tenant’s to understand but why is it not an option for most buildings?

The vast majority of commercial real estate landlord’s prefer to operate with a triple net lease if the building allows for it, most do. This allows the landlord to keep its net rental income separate from the property expenses which are paid for by the tenant through an additional rent commonly known as TMI, it also allows landlord’s and tenant’s to see clearly how the base rental rate compares to similar buildings in the market without property expenses clouding the comparison. Some property expenses (but not necessarily all, gross leases vary case by case) that might be grouped into a gross rental rate might be property taxes, building insurance, utilities, property maintenance, service contracts, property management etc.

As mentioned above the vast majority of landlord’s will use some form of triple net lease and a tenant should be prepared to know what that entails. Although a gross lease is easier to understand from the tenant’s perspective, don’t expect a landlord to agree to use one unless there is a unique building/situation that warrants it. For anyone that might have questions about gross and net leases I’m open to answering some questions.

Commercial Real Estate Lease

Commercial Real Estate Lease

What is a Default Notice in a Commercial Real Estate Lease?

A default notice is a document served to a tenant or landlord to notify them that they have not complied with one or more obligations in their lease. Something important to note about a default notice is that it is NOT an eviction notice, but it would be unwise to ignore it because the consequences could be significant. The purpose of the document is to let a party know what the particular problem is and a time frame in which it needs to be remedied. If the problem isn’t remedied within the specified period then action may be taken. What sort of action is taken? That depends entirely upon the scenario and the way the lease is written.

The most common default notice is served to tenant’s is for non-payment of rent, however, there are many more reasons a tenant may receive such a notice. To name a few other potential issues that could require a default notice would be to repair damage caused to the property by a tenant, to comply with parking requirements as per the lease, to cease an activity that isn’t permitted in the lease etc. The type of action that would be taken by a landlord if a tenant doesn’t remedy a default really depends on the scenario and the wording of the lease, but, failing to remedy a default that a landlord considers to be a serious issue could have some significant consequences such as eviction and/or legal action. If you have been served a default notice by your landlord it would be wise to start some dialogue as you work towards your solution. Ignoring such a notice would give the landlord the impression you aren’t even making an attempt to correct the problem which would likely motivate them to take serious action at the earliest possible opportunity.

Can a Landlord be served a default notice? Yes. While most commercial leases are worded to be pro-landlord (because it’s their property) there should be wording that also protects the tenant to ensure the property functions as it should in order for the tenant to operate their business as intended. An example of a default notice a tenant can serve the landlord is if a landlord has not completed work stated in the lease, for example if the landlord fails to install roughed in plumbing they promised in the lease then the tenant can service notice to the landlord to remedy that. The types of action a tenant can take if a landlord defaults varies depending on the type of issue and the wording of the lease.

While there are many reasons a default notice can be served, it shouldn’t always be the first action taken especially for non-serious issues. Most times some regular communication between landlord and tenant can prevent problems from forming to begin with and having that kind of landlord/tenant relationship is ideal to maintain if possible.

Why are Commercial, Industrial, and Office real estate leases so long?

“Why is this lease so long?”, “Is all of this wording really necessary?”

I get questions like this from either new businesses, or businesses that have come from a building that simply had a very relaxed leasing policy. More often than not, a relaxed leasing policy and short lease documents that lack detail cause problems.

A commercial real estate lease should be very detailed about the relationship between landlord and tenant. Not only should it contain important details about the deal such as lease term, start date, rental rates, size of premises, use, etc, but it also needs to have details about rules on the property, insurance requirements, types of action that can be taken in the event of a default, environmental responsibilities, and so on. The list is actually quite extensive for what can be contained in a commercial real estate lease which is why most documents are dozens of pages in length. My document often ends up between 30-35 pages depending on the tenant, building, landlord, type of lease, zoning, etc. While many tenant’s may think that’s a long document, I feel each point is necessary and would have difficulty shortening it. I would actually have an easier time finding content to add than take away.

Back to the questions, why are leases so long and is it necessary? If a tenant asks that question and I look at the building they’re in, I likely see issues such as poor maintenance, poor parking arrangements, structural issues, driveway pothole and access issues, and tenant conflicts. A properly written lease document that can address those issues and is enforced by the landlord and tenant ensures fewer issues for both parties. A lengthy lease should be considered as necessary by both parties because leases should be designed to protect the interests of both landlord and tenant. Yes, leases by default are naturally pro-landlord, but that’s because it’s their property. That doesn’t mean there isn’t or shouldn’t be protection for tenant’s so that is something you need to look for and ensure is in your lease. The landlord’s I represent take good care of their buildings because the lease requires them to. This allows the tenant’s to use the property as efficiently as possible to run their businesses, as long as they follow the rules with the other tenant’s. This is the ideal situation for everyone.

Every clause in my lease has a reason and my document is updated when new industry trends occur or new issues are discovered in the marketplace. Each clause has a purpose because at one point it was created to correct a problem or properly define something.

So is all that wording necessary? Absolutely. As long as it reflects the needs of your business and protects the interests of both parties, every clause should be seen as necessary and relevant. Make sure you are represented by a knowledgeable commercial real estate broker to ensure you get what you need from your lease.