Terminology associated with the leasing of a commercial space
Net rent
Net rent is often used to refer to a situation in which the lessee pays some or all of the property taxes, in addition to the base rent.
Net net rent (double net)
Net net rent means that the lessee is responsible for property taxes and insurance.
Net net net rent (triple net)
In addition to the base rent, the lessee in a triple net lease is responsible for his proportional share of all expenses relating to the operation of the immovable. A detailed list of these charges normally makes up several paragraphs in specific clauses of the lease. The only expenses remaining to be paid by lessor are usually related to the immovable’s structure.
In a net lease, major expenses incurred by the lessor to improve the immovable (other than expenses to maintain the building in good condition), which represent capital expenses, are amortized over the useful life of the improvement and passed on to the lessees.
Administration fees can be added to operating expenses. They represent a percentage of operating costs, usually around 15%.
Proportional share adjustment clause
Many leases include a gross-up clause. In this type of clause, the operating costs to be paid by the lessee are adjusted based on the share he occupies compared to the leased area of the immovable, rather than on the total leasable area. The purpose of this is for lessees in an immovable with a certain vacancy rate to pay a fair share of the fixed costs, other than taxes, that are not dependent on the occupancy rate, which the lessor bears for the vacant space.
Prorated or percentage rent lease
This type of lease is most commonly found in shopping malls which, in addition to a base rent, require lessees to pay a certain percentage of their gross revenue over a predetermined threshold. The threshold may be natural or artificial. The lessees concerned by this type of agreement are themselves merchants or retailers.
► DUTIES AND OBLIGATIONS OF THE BROKER
It is important to note that the payment of operating costs and property taxes is the subject of significant negotiation, especially since these costs are not governed by the provisions of the Civil Code.
A real estate broker who wishes to ensure that certain categories of fees are excluded for his client must specify this in the lease:
- Cost of replacement, repair, modification or addition to the structure;
- Cost to bring a building into compliance;
- Cost of repairing a latent defect;
- Payment of a fine for which the lessor is responsible;
- Incentives for other lessees to lease;
- Etc.
In addition to the above, remember that it is the clear and detailed description in the lease that will establish the extent of the lessee’s liability. A careful reading of the clauses proposed by the lessor in the offer to lease is essential to respect the broker’s obligations to inform, verify and advise.
