What Is a Gross Lease?
A gross lease is an agreement that requires the tenant to pay the property owner a flat rental fee in exchange for the exclusive use of the property. The fee includes all of the costs associated with property ownership, including taxes, insurance, and utilities. Gross leases can be modified to meet the needs of the tenants and are commonly used in the commercial property rental market.
- A gross lease is a lease that includes any incidental charges incurred by a tenant.
- The additional charges rolled into a gross lease include property taxes, insurance, and utilities.
- Gross leases are commonly used for commercial properties, such as office buildings and retail spaces.
- Modified leases and fully service leases are the two types of gross leases.
- Gross leases are different from net leases, which require the tenant to pay one or more of the costs associated with the property.
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How a Gross Lease Works
A lease is a contract between a lessor or property owner and a lessee or tenant. This contract is often written and gives the tenant exclusive use of the property for a certain period of time. The tenant agrees to pay the owner a fixed sum of money on a regular basis, whether that's weekly, monthly, or annually.
A gross lease is a type of lease that allows the tenant to use the property exclusively by paying a flat fee. It is commonly used for rentals in commercial property, such as office buildings and retail spaces that have numerous lessees. Fees or rents are calculated by landlords to reasonably cover the operating costs of these spaces. These expenses include:
- Property taxes
- Standard utilities
- Other expected and everyday expenses
This rent calculation may be done through analysis or from historical property data. The landlord and tenant can also negotiate the amount and terms of the lease. For example, a tenant may ask the landlord to include janitorial or landscaping services.
Gross leases allow tenants to precisely budget their expenses. These leases are especially beneficial for those with limited resources or businesses that want to minimize variable costs to maximize profit. Companies can concentrate on growing their business without the complexities associated with net leases.
When a gross lease excludes insurance and utilities, the tenant is required to absorb those costs.
Types of Gross Leases
Gross leases fall into two different categories. The first is called a modified gross lease while the other is called a fully service lease.
Modified Gross Lease
A modified gross lease contains the principal provisions associated with a gross lease, but it can be adjusted to suit the needs of the property owner and the tenant. It is essentially a combination of a gross lease and a net lease, where the tenant pays base rent at the lease's inception.
This kind of gross lease takes on a proportional share of some of the other costs associated with the property as well, such as property taxes, utilities, insurance, and maintenance. For instance, these modifications may state that the tenant is responsible for the costs associated with the electric utility, but that the property owner is responsible for waste pickup.
Modified gross leases are commonly used with commercial spaces where there is more than one tenant, such as office buildings. This type of lease typically falls between a gross lease, where the landlord pays for operating expenses, and a net lease, which passes on property expenses to the tenant.
Fully Service Lease
A fully service lease is one of the easiest gross lease options available. It requires the tenant to cover just the rent while the landlord assumes responsibility for every other cost. As such, the property owner calculates the cost of other expenses, such as utilities, property taxes, and maintenance, into the rental amount.
This type of gross lease allows the tenant to rent without having to budget for additional costs, including property maintenance. But because the landlord covers the extra costs, fully service leases can often be more expensive.
Be sure you read the fine print of any lease you sign.
Advantages and Disadvantages of a Gross Lease
As with any other type of contract, there are benefits and drawbacks to signing a gross lease for both the landlord and the tenant. We've listed some of the most common pros and cons below.
Advantages and Disadvantages to the Landlord
Property owners can benefit in several ways by choosing a gross lease to rent out their properties:
- Commanding a higher amount by rolling the operating costs into the rental fee
- Passing on any inflationary costs to the tenant when the cost of living increases annually
Despite these benefits, the drawbacks to landlords include:
- Assuming the responsibility for any additional costs associated with property ownership, including unexpected costs such as maintenance or larger utility bills if a tenant misuses water or electricity
- An increase in administrative duties for the property owner, such as taking the time to ensure that the bills and other expenses are paid on time
Advantages and Disadvantages to the Tenant
A gross lease help tenants in the following ways:
- The cost of rent is fixed, so there are no additional costs associated with renting the space
- There is a time-saving component since the tenant doesn't have to take care of any administrative duties associated with the property's finances
Some of the primary cons include:
- Higher amount of rent, even though there are no additional costs to pay
- A lax or unresponsive landlord who may not keep up-to-date with property maintenance
Landlords can roll additional costs into the rent
Landlords can pass on inflationary costs to the tenant
Tenants aren't responsible for any costs other than the rent
Tenants can focus their time on their business rather than the rental space
Landlords are responsible for any additional costs
Landlords must spend more time on administrative duties associated with paying the operating expenses
Tenants may have to pay a higher amount in rent than if they were also responsible for paying the bills
Tenants may have to deal with landlords who don't keep up-to-date with maintenance
Gross Leases vs. Net Leases
A net lease is the opposite of a gross lease. Under a net lease, the tenant is responsible for some or all costs associated with the property, such as utilities, maintenance, insurance, and other expenses. There are three types of net leases:
- Single net lease: The tenant pays rent plus property taxes.
- Double net lease: The tenant pays rent plus property taxes and insurance.
- Triple net lease: The tenant pays rent plus property taxes, insurance, and maintenance.
Net leases may allow tenants more control over some costs and aspects of the property, but they come with an increased degree of responsibility. For instance, if maintenance is a cost borne by the tenant, they may have the ability to make cosmetic changes. However, they also absorb most repair costs.
Landlords often restrict or prohibit cosmetic changes to the property even when maintenance is a tenant expense. Tenants are also subject to variable utility costs. To regulate the expenses, they may employ different strategies to reduce consumption.
Gross Lease FAQs
What Is the Different Between a Lease and Rent?
A lease is a contract between a property owner and a lessee where the landlord agrees to give the tenant full access to the property. Rent, on the other hand, is the fee charged by a property owner for the exclusive use of their property by a tenant.
What Are the Main Types of Commercial Leases?
The main types of commercial leases are gross leases and net leases. These two categories are further broken down into modified gross leases, fully service gross leases, single net leases, double net leases, and triple net leases.
What Is the Most Common Type of Commercial Lease?
The most common and simplest type of lease is the gross lease. It is a contract between a landlord and tenant, wherein the lessee, in exchange for the exclusive use of a piece of property, agrees to pay the lessor a fixed sum of money for a certain period of time that encompasses rent and all costs associated with ownership, such as taxes, insurance, and utilities.