If you own or manage a business in Tacoma, you know how difficult it can be to find a commercial lease. Reading through a commercial lease agreement can be confusing and overwhelming. Signing a lease that you don’t understand could cause you some serious headaches down the road.
At Blado Kiger Bolan, P.S., we understand how frustrating it can be to execute a new lease. Our team of experienced attorneys can help you with your lease. Whether you need someone to review your lease or you are in the midst of a dispute over an existing lease, we can work with you. We created this net lease guide to help tenants like you understand some of the essential aspects of net leases in Washington.
What is a Net Lease?
You probably already know that a commercial lease is an agreement between a landlord and a tenant to rent an office, warehouse, or other commercial property. But what does the “net” stand for in a net lease? A net lease is a lease where the tenant pays for all or part of the maintenance, insurance, and taxes arising from the property. Generally, there are three types of net leases in Washington: net (N), double net (NN), and triple net (NNN).
Single Net Leases
In a single net lease, you will usually be responsible for paying only one of the expenses associated with the property. Often, this means that the tenant will be responsible for paying property taxes, leaving the owner to handle the payment of insurance and maintenance costs. Single net leases are relatively uncommon nowadays.
Double Net Leases
In a double net lease, you will be responsible for paying two of the ordinary expenses of the property, such as maintenance and insurance (or any other combination of expenses). Double net leases are relatively common in commercial real estate. Some tenants prefer these leases because they may result in lower base rent.
Triple Net Leases
A triple net lease will typically leave you paying all the property taxes, maintenance expenses, and insurance on the leased property. In these leases, you are essentially responsible for the entire upkeep of the property. Triple net leases will often have even lower base rent relative to the net and double net leases because of the reduced overhead for the landlord. This reduction, however, comes at the cost of much more responsibility and risk.
Gross Commercial Lease
Unlike net leases, with a gross commercial lease, the landlord remains responsible for all the taxes, maintenance fees, and insurance costs for the property. Some tenants may prefer the lessened risk and responsibility of a gross commercial lease. The downside is that the landlord will pass its costs down to the tenant in higher rent. A gross commercial lease will also remove a tenant’s flexibility in finding their providers to save costs. The landlord may not be as motivated as the tenant is in reducing the costs of expenses.
Things to Look Out for with a Net Lease in Washington
Now that you have an idea of the differences between net, double net, and triple net leases, you may want to consider some of the areas of concern when reviewing a net lease. While every lease is different, there are some issues that we frequently see when reviewing commercial leases.
It’s not necessarily unusual to find management fees in a commercial lease. Many landlords will hire a property manager or property management company to run the building. That said, you need to look out for unusually high management fees. Fees over 15% of maintenance costs may be excessive. Management fees may be even more out of place in a triple net lease, especially if they apply directly to the leased premises and not just common area maintenance (CAM).
If your business is relatively new, there is a decent chance that the landlord will ask you to sign a personal guarantee for the lease. This means that even if you go out of business, you will still be personally responsible for the lease. Personal guarantees tend to be three to five years long, but some can be even longer. So you should think long and hard about how comfortable you are being liable for the property for that long.
There may be language in the lease that states you can use the premises for only certain purposes. Other provisions may also explicitly prohibit other uses, like the sale of alcohol. Make sure the language in your lease does not exclude core elements of your business. For example, if you are opening a karaoke bar and the lease prohibits music from being played past 7 PM, you could have a problem.
Breach of Lease
What happens if you violate the terms of your lease? Does it matter if the violation was minor? Do you get an opportunity to cure (fix) the issue? These are all critical questions to ask when reviewing a commercial lease. You need to know what the rules are and what happens if you break them. You should also keep an eye out for the types of damages the landlord can seek. And what about your remedies? If the landlord violates a lease provision, what are your options? Some leases try to limit you to seeking only specific performance (i.e., the landlord has to fix the issue or take a particular action). Other leases allow you to look only to the building itself for damages, meaning you can’t collect from the landlord’s other assets. What does your lease say?
Talk to a Washington Real Estate Lawyer
Too many businesses are willing to sign a lease without actually reading it. Others trust that their real estate agent would not lead them astray. Signing a net lease without understanding what it says could cost you dearly. Fortunately, our team of experienced real estate matters attorneys in Tacoma can help. Our lawyers can go over the lease and tell you exactly what it says. We’re not afraid to push back on unfair provisions either. A lease should feel like your company’s home, not a trap. Contact us today to discuss your lease.