When renting property, a lease is a formal contract that lays out the responsibilities of the tenant and property owner. It details the length of ownership, due date of rent, and who’s responsible for what in the maintenance of the property.
In this blog, we’ll cover the different types of lease available, including:
- Full service leases
- Net leases
We’ll briefly look at the prominent features of both as well as the differences between them. Read on to find out more.
What does Full Service Lease Mean?
A full service lease saddles the landlord with all of the operating costs. The tenant won’t be paying anything more than their rent, even if something breaks and needs urgent fixing. The costs that the landlord is responsible for can vary, though typically the lease will outline payments of anything that isn’t rent, such as:
- Maintenance of the property
- Monthly utility bills
- Real estate taxes
- Property insurance
The landlord won’t be footing the bill for nothing in return. In properties with a full service lease in place, tenants can expect higher base rents, which cover some of the cost of other bills and ensure the landlord doesn’t lose money.
Landlords also won’t be liable to pay all bills without a limit. The lease will include an expense stop, which prevents landlords from paying over a certain amount each month, so if the tenants decide to use an extraordinary amount of electricity, the landlord won’t have to shell out for it. Instead these excess expenses will be passed on to the tenant.
It’s more common to see full service leases in rental properties with multiple tenants. It can be found in both the commercial and private property worlds. An office or retail lease might be full service, as well as house share properties or student accommodation. In these situations, it can be tricky to split up utility bills fairly between tenants or to work out who should pay for communal area maintenance. To resolve the issue, all tenants will pay a uniform base rate for rent that includes property expenses.
Although they’re more common in communal properties, you do find full service leases in properties with just one tenant, too. It can even be a main selling point. Many tenants like the idea of having all of their bills tied up into one neat sum every month and it might look like they’re getting a bargain on the rent because of it. Looking at two properties that look similar on paper, but one is only slightly more expensive and includes all bills and maintenance paid for, it’s not hard to work out which is more appealing.
Different types of Commercial Real Estate Leases
In this section, we’ll look at the different types of lease available. These include:
- Full service leases (or full service gross lease)
- Single net leases
- Double net leases
- Triple net leases
We’ll also look at some of the similarities and differences, ensuring that both landlords and tenants have the knowledge they need to make the right choice.
Full-Service Gross Lease
When it comes to lease type, full service puts responsibility in the landlord’s hands. We’ve already explained in detail what this lease entails, but for clarity, here are the main attributes:
- The landlord pays all operating expenses, including utility bills and taxes, which can be limited as per the terms of the contract.
- The tenant pays an unchanging base rate
- The base rate includes the costs of the bills
- It’s more common in properties with multiple tenants
The net lease flips the full service gross lease on its head. Rather than giving the landlord the responsibility for operating costs, the tenant is given them instead. That means that they’ll have to pay other bills to keep the property up and running alongside their base rent. But, there are different types of net leases that vary slightly.
Single net leases
The tenant only pays the property taxes. All other expenses, like utility bills and maintenance, fall to the landlord.
Double net leases
In this agreement, the tenant will pay for both the property taxes and the property insurance.
Triple net leases
In this scenario, every single operating cost is paid for by the tenant, including all taxes and insurance, bills, maintenance, and repairs. The landlord is completely exempt from operating costs, aside from those they’ve agreed to (like problem areas, such as recurring damp spots and any exterior damage).
A triple net lease is considered the most landlord-friendly of all of the options. A full service lease is considered the most tenant-friendly and can be enticing to property viewers.
If a potential tenant is put off by having to cover all operating costs, you can adjust your triple net lease to be a little more tenant-friendly. For example, you can opt to pay for upkeep and any repairs that weren’t the tenants fault, such as wear and tear to the floor over time.
Full Service Lease Structure – What’s In the Lease?
If you’re in commercial real estate, you’re going to run into full service leases constantly. They’re incredibly common and can benefit both the landlord and the tenant.The tenant has one easy bill to pay and less responsibility for the property, and the landlord has a more appealing property and doesn’t have to deal with problems from tenant disagreements.
The full service lease has to include certain information. It’s vital you understand what should be included before you either construct the lease or enter into a tenancy agreement.
In the lease, there’ll be some basic information. This will include the party’s information on both sides and specifics about the property, including the address and all the appliances included.
It will also list all of the utilities and services needed at the property, from electricity to regular maintenance services (like mowing the lawn). In a full service lease, it will be specified which of these the landlord will pay for and which the tenant will pay for, and if the tenant has to cover any regular bills, a due date for payment may be shown.
Then there’ll be the terms of the lease, including what happens to the tenant if they break the lease, how your tenant can leave the property before their agreement is up, and what will happen if the tenant chooses to stay after the agreement ends. Some leases may give tenants the opportunity to renew the lease or to move to a month-to-month agreement.
The monthly rent amount, including all of the utilities that the landlord will cover, will then be listed, along with the due date. Any additional fees, such as late fees, will be outlined. If you only pay for certain bills, these should also be outlined, such as only paying for maintenance if the tenant keeps the property in good condition. The expense stop should be clear, too, to make sure the landlord doesn’t end up with a huge bill from the tenants’ use of the property.
It’s also wise to add a list of obligations for both parties. For tenants, these can include:
- Using the property for specific purposes only
- Not disturbing other tenants in or around the property
- Complying with the rules outlined in the lease
- Keeping up with regular maintenance
Of course, that’s just some of what’s included in a full service lease. But it should give you an idea of what to expect as either the landlord or the tenant.
Full Service Lease vs Gross Lease
Often, there’s confusion between a full service lease and a gross lease. Though the names are different, these are actually the same thing. Both terms (and variation on these, such as full service gross lease) are referring to the full service lease described above.
Opting for the right lease, both as a tenant and a landlord, can determine the success of the rental period. A full service lease, for example, is ideal for limiting tenant-landlord disagreements in a multi-tenant property. However, it’s more tenant-friendly, and landlords with single-tenant properties may prefer to choose a net lease option so that they have less responsibility for the property. By handing over control of all or some of the bills to the tenants, the work of the landlord is reduced and they can earn their rental income without worrying about monthly variations due to changes in bills. This article should help guide you in the right direction, but if you need further help then speak to a professional who can look at your unique case.
Looking to buy commercial property for investment?
Contact us to get Your Simple Plan for Generating Predictable Passive Income from Commercial NNN Properties. We’ll be there every step of the way.
- Contact – click here to receive your custom property list
- Consultation – Tell us about your goals, needs, timeframe, risk tolerance, and budget
- Property List – Receive your hand picked investment opportunities tailored to your needs
- Take Action – Choose your property and lock in your investment