Commercial leases are inherently more complicated than residential ones, and they come in multiple forms, but the triple net – or NNN – lease tends to generate the most confusion – and the most potential problems.
While they are common, triple net leases have significant legal and financial implications that both landlords and tenants need to understand before they sign on the dotted line.
How does a triple net lease work?
A triple net lease is an arrangement where the commercial tenant receives a lower base rent in exchange for paying three other expenses tied to the property: property taxes, insurance and maintenance costs. Those are the three “nets” that give the lease its name. When a landlord absorbs the responsibility for those expenses, the estimated cost is usually figured into the proposed rent.
Triple net leases are seen frequently in retail, office and industrial rental agreements. Landlords like them because they are predictable. They reduce the fluctuating costs that can happen due to sudden tax levies and unexpected maintenance bills. Given the length of most commercial leases, that translates to a long-term steady income with minimal need for oversight on the landlord’s part.
Tenants, too, sometimes prefer NNN leases, because they have more direct control over the property. A long-term tenant may prefer to have direct control over the appearance and upkeep of a property, and may feel that they can manage their own costs better than a landlord, particularly if the landlord has many properties or is largely absent.
Are title net leases unfair?
NNN leases are not inherently unfair to tenants, but they’re often misunderstood. A tenant’s expectations of costs can only be based on the past. Most commercial leases last for years, so the tenant is gambling that those costs will remain steady.
The problems crop up when property taxes and insurance premiums suddenly go up. In addition, maintenance costs only tend to increase over time, especially in older buildings. Some leases go beyond routine upkeep and small repairs and put all of the responsibility on the tenant for roofing, HVAC systems, plumbing and more.
Landlords also take a little bit of risk when they use an NNN lease. They’re relying on the tenant to maintain the property and stay current on taxes and insurance. If that doesn’t happen, the property could be negatively affected.
Both sides run the risk that other disagreements will erupt and turn into litigation. If the language of the lease isn’t clear, disputes can start over what qualifies as the tenant’s responsibility and doesn’t, or how much control a tenant has over non-essential renovations.
Before signing a triple net lease, a careful review by a real estate attorney can help spot issues that might not be obvious at first glance. They can also discuss the practical impact of the lease’s terms in plain language. This can help make sure that the agreement is what both parties intend.
