Explained: Types of Commercial Leases
When it comes to setting up a business in Vancouver, understanding the different types of commercial leases available is crucial.
A commercial lease is a legally binding contract that outlines the terms and conditions under which a business can occupy a property. In this article, we will delve into the various types of commercial leases in Vancouver, providing you with valuable insights to help you choose the lease structure that best suits your business needs.
Gross Lease
A gross lease, also known as a full-service lease, is one of the most common types of commercial leases. In this arrangement, the landlord is responsible for covering all operating expenses, including property taxes, insurance, utilities, strata fees, garbage disposal and maintenance costs. The tenant pays a fixed rent, which typically includes these expenses.
A gross lease offers simplicity and predictability as the tenant's financial obligations remain consistent throughout the lease term. Gross leases are common for office spaces or where the unit is part of a shared larger space. This type of lease offers stability for the tenant and puts unexpected costs on the shoulders of the landlord. For example, if property values increase y/y and with that municipal taxes increase, the tenant will not have to pay more towards the increased cost. This type of lease typically diminishes landlord returns over the course of the lease if costs go up but the tenant’s rent stays flat over the term.
Modified Gross Lease
A modified gross lease combines elements of both the gross lease and the net lease. It typically involves a base rent that covers most operating expenses, with the tenant responsible for additional expenses such as utilities, janitorial services, and sometimes property taxes. The specific terms and allocation of expenses can be negotiated between the landlord and tenant, offering flexibility in lease structures.
Net Lease
Unlike a gross lease, a net lease requires the tenant to pay a portion of the operating expenses in addition to the base rent. There are three main types of net leases:
Single Net Lease: In a single net lease, the tenant is responsible for paying the property taxes on top of the base rent, while the landlord covers other expenses such as insurance and maintenance.
Double Net Lease: In a double net lease, the tenant pays property taxes and insurance premiums, while the landlord assumes responsibility for maintenance and repairs.
Triple Net Lease: A triple net lease places the majority of expenses on the tenant, including property taxes, insurance, and all maintenance costs. This type of lease offers the least amount of responsibility for the landlord and the most for the tenant. A triple net lease is the most common type of lease for retail units in Vancouver. Tenants should be advised on how much their “additional” rent may be impacted over the course of the lease. Rising land values due to re-zoning or other factors can mean huge jumps in property taxes which are then passed down to the tenant.
Percentage Lease
Commonly used in retail settings, a percentage lease is structured based on a percentage of the tenant's gross sales. In addition to a base rent, the tenant agrees to pay a percentage of their revenue to the landlord. This arrangement allows landlords to benefit directly from the tenant's success. The percentage can be a fixed rate or a sliding scale that increases as sales increase.
By understanding the various types of commercial leases available, you can make an informed decision that aligns with your business requirements and financial capabilities. It is always advisable to consult with a real estate professional and legal expert to ensure you have a comprehensive understanding of the terms and conditions before removing conditions and signing a commercial lease agreement.
