19 August 2019/ rent_commercial_property_guide

What are the different types of commercial leases?

Securing your business a base of operations takes a lot of time and effort. Whether you are moving to a bigger space to facilitate growth or you are finally moving out of your home office, there is a long checklist to work through. So, after scouting out the right area, researching the local area and looking at what exactly you need from a commercial property, you are ready to start putting some offers on the table.

See commercial property for rent in your area on Realla

Well nearly. First, you need to work out what kind of commercial lease is best for you and your business. The world of commercial leases is one filled with jargon, and it can often be hard to get a good idea of the pros and cons of each option.

That’s why we’re here. Below is a quick and easy breakdown of all the different types of commercial leases and the main differences between them.

What is a lease?

A commercial lease is a contract between your business and the landlord of the property you are looking to rent from them. As with all contracts, your lease outlines the nature of your relationship and the expectations and obligations that each partner has towards one another.

A lot of people make the mistake of assuming that commercial leases are basically the same as their residential counterparts. While this is true in terms that both are a legal contract, commercial leases tend to be more complex because the terms are negotiated and can differ greatly from lease to lease.

The terms of your commercial lease and the rent price you end up paying will depend on a number of factors, such as the location, the nature of the work you do, the property’s current condition and the current health of the commercial property market.

The type of lease that is being proposed will also have big impact on the deal you get.

The different types of commercial leases

The commercial lease you sign may not seem like one of the most important things you’ll do when trying to set up a new business or grow an existing one, but the decision you make now will have long-term effects on your operations. Locking yourself into a bad deal could see you paying higher rent then you need to, potentially affecting your ability to hire staff or purchase new equipment.

Making sure this doesn’t happen is all about getting to know the different kinds of leases that you are likely to encounter during your search for the right home for your company. It is important to remember, though, that the terms of all leases can be adjusted over time as long as both parties agree to the changes.

Gross leases

Here, the landlord is responsible for paying property tax, insurance and any maintenance costs. You will usually be asked to pay a flat fee in order to use the property.

From your point of view, a gross lease is easier to manage as your regular admin will be greatly reduced. You may have to pay more for the privilege though, as your landlord will take into account the costs associated with the property when coming up with a suitable monthly rent cost. They will want to make sure they aren’t out of pocket, and so will likely pass on some of these costs to you in the form of higher monthly payments.

For businesses, the big benefit of a gross lease is having a single monthly outgoing without the threat of any unexpected bills popping up. This makes financial planning and cashflow management a lot easier.

Net leases

Net leases are the most common form of commercial lease in the UK. You will have to pay some of the extra costs associated with the property. Whether you are responsible for paying all of the building’s taxes, utility bills and maintenance costs or just a portion will depend on the specifics of your deal.

There are three main types of net lease:

  1. Single net lease: you assume responsibility for all property taxes instead of the landlord, who will take care of all the other expenses. The benefit for you here is that taxes tend to be fixed and predictable amounts that can be planned for. The government always gives businesses time to prepare for rate increases. Maintenance costs on the other hand, can seemingly spring out of nowhere.
  2. Double net lease: you pay both property taxes and insurance premiums. The landlord is still solely responsible for paying for building maintenance. These are the most popular kind of commercial lease in the UK because they are favoured by landlords. It is highly likely you will run into a few during your property search.
  3. Triple net lease: you pay all additional property costs as well as the rent. Why would you want to assume all of the responsibility and costs of your rental property? Well, the usual trade-off is that the landlord will offer you a lower monthly rent to accommodate for you taking all of the administration off their hands. Triple net leases are favoured by investors who are looking for a steady income and less risk, and who probably have a portfolio of many properties.

Percentage leases

This one is more unusual, and you are not that likely to be offered one. Percentage leases involve you paying a fixed rent plus a percentage of your monthly revenue. Your rent will be lower, but the more successful you become the more you pay to your landlord. These leases may be suited to companies looking for low rent prices while they establish themselves and get going.

Other things to be aware of 

Knowing about the different kinds of commercial leases is only the start, you still need to get out there and secure yourself a good deal.

Here are few important things you are going to need to consider:

Getting some help

Leases are legal contracts, and as with everything legal they can get complicated. If you don’t think you can make sense of the lease on your own and want to make sure you are getting the deal you expect, you will need to get a specialist lawyer on board. There are lots of lawyers who are experts in commercial property, who will be able to advise you and even negotiate the deal on your behalf.

Commercial classifications

Once you get your lease, you may be ready to completely redecorate the property in order to really make it yours. But, you need to check your buildings commercial classification, which govern what kind of activities are allowed to take place there.

For example, A1 properties can only be used for retail businesses like shops and hairdressers, while B1 are reserved for offices or R&D facilities.

You need to make sure you are looking for properties with the right classifications. This will make your search a lot less likely to be full of disappointments and false starts.

Commercial leases: important clauses to watch for

Every commercial lease is different, and you are free to try and negotiate the best terms for yourself. Don’t forget that your landlord will also be doing this, and they are likely to be far more experienced in agreeing leases than you. Your lawyer will be able to explain everything to you, but here are some particularly important areas of consideration:

Length

When entering into a lease you need to have an idea of how long you want the agreement to last. Most landlords will want you to stay in the property for at least of a couple of years, but as a young dynamic company it can be hard to know your position at the end of that time period.

You may want to insert a break clause into the contract. This enables you to end the lease early after a certain period of time (such as three years into a five year lease). The ability to sublease the property to another business could also allow you to honour the agreement even if you end up moving to a different property.

Payment

Paying your rent and additional payments on time is obviously the bedrock of any commercial lease. Knowing exactly what is expected of you is vital. Your contract could include penalties for late payments, and how many late payments will be tolerated before an eviction notice is served.

Guarantees

It is likely that you will be asked to provide a guarantee that you will be able to meet your rent obligations each month. This usually takes the form of a bank guarantee or financial accounts, but could also be a cash deposit to cover a missed payment. Making sure you have these at the start of the search will greatly speed up the negotiation process.

Looking for commercial property to let? Check out Realla and find your next commercial property for rent!