Which Type of Commercial Lease Should You Choose As A Tenant & Why?

Selecting the right type of commercial lease can be one of the most critical decisions a tenant makes when entering into a business agreement. The type of lease you opt for will have significant implications on your operating costs, risk exposure, and long-term profitability. There are different types of commercial leases, and the best choice depends on the nature of your business, financial capabilities, and risk tolerance.

In this comprehensive guide, we’ll examine the various types of commercial leases, weigh their pros and cons, and provide practical examples of which types of businesses may benefit from each lease type.

Table of Contents

Types of Commercial Leases

1. Full Repairing and Insuring Lease (FRI Lease)

The Full Repairing and Insuring (FRI) lease is one of the most common types of commercial leases, particularly for long-term tenants. Under this lease, the tenant is responsible for all repair and maintenance costs, as well as building insurance.

• Pros:

• Provides long-term security, especially for established businesses.

• Gives tenants control over repairs and building condition, which can help prevent unexpected deterioration.

• Ideal for businesses that plan to stay in a location for an extended period.

• Cons:

• High costs: tenants bear the full responsibility for repairs, which can be expensive, especially if the property is old or large.

• Time-consuming: overseeing repairs and maintenance can detract from the primary business focus.

• Who should consider this lease?
  Established businesses with strong financial backing, such as large retailers or warehouse operators. For example, a chain supermarket may benefit from this lease as they can better manage and maintain the premises over a long period, ensuring minimal disruption to their operations.

2. Internal Repairing Lease (IR Lease)

An Internal Repairing (IR) Lease is where the tenant is only responsible for repairs within the interior of the property, leaving the external repairs and structural maintenance to the landlord.

• Pros:

• Reduced liability for expensive repairs like roofing, external walls, and foundations.

• Lower overall costs compared to an FRI lease.

• A more predictable outlay for the tenant.

• Cons:

• Less control over the state of the building’s exterior, which could affect the business if not well-maintained by the landlord.

• External issues might still impact the tenant’s business (e.g., roof leaks).

• Who should consider this lease?
  Businesses such as office-based companies or professional service providers like law firms and accountants, where internal aesthetics and functionality are critical, but the external appearance is less of a priority. For example, a tech startup renting office space may prefer an IR lease to focus more on their core activities without worrying about external building maintenance.

3. Net Lease

Under a Net Lease, the tenant pays rent as well as a portion of the property taxes, insurance, and maintenance costs. These costs are typically itemized in the lease agreement. There are various subtypes of net leases:

• Single Net Lease (N): Tenant pays a portion of property taxes along with rent.

• Double Net Lease (NN): Tenant covers property taxes and insurance in addition to rent.

• Triple Net Lease (NNN): Tenant is responsible for property taxes, insurance, and maintenance costs.

• Pros:

• Often lower base rent compared to other lease types.

• More transparent breakdown of property-related expenses.

• Ideal for tenants who want more financial control.

• Cons:

• Potentially higher total costs as tenants bear part or all of the financial burden for taxes, insurance, and maintenance.

• In the case of an NNN lease, the tenant takes on the majority of the landlord's responsibilities.

• Who should consider this lease?
  Tenants such as retailers or restaurants, particularly franchises, often find a Triple Net Lease appealing. For example, a fast-food chain leasing a standalone property might prefer a NNN lease where they can control how the property is maintained, ensuring it aligns with their brand image.

4. Gross Lease

A Gross Lease, also called a full-service lease, is where the tenant pays a fixed rent, and the landlord covers all property-related expenses, including taxes, insurance, and maintenance.

• Pros:

• Predictable costs: the tenant knows exactly how much they will pay each month.

• Simplified payments as the tenant only has to worry about rent.

• Great for businesses looking for cost certainty without unexpected financial surprises.

• Cons:

• Higher rent: landlords often charge a premium to cover the costs of taxes, insurance, and maintenance.

• Lack of control over maintenance and repairs, which could affect the tenant’s business.

• Who should consider this lease?
  Small businesses, startups, or short-term tenants that need predictable overhead costs and minimal responsibility. For instance, a new local café or small retail boutique might benefit from a gross lease, allowing them to focus on establishing their business without worrying about unpredictable property-related costs.

5. Percentage Lease

In a Percentage Lease, the tenant pays a base rent along with a percentage of their gross income from sales. This type of lease is common in retail settings, particularly in shopping centers or malls.

• Pros:

• Flexibility: rent payments increase or decrease in line with business performance.

• Lower base rent to start with, making it attractive for new businesses.

• Aligns the landlord’s interests with the success of the tenant’s business.

• Cons:

• Potentially higher overall costs if the business is highly successful.

• Uncertainty around total rent payments, which can make financial planning more difficult.

• Who should consider this lease?
  Retail businesses in high-traffic areas, such as clothing stores, jewelry shops, or pop-up retail outlets. For instance, a seasonal business or an ice cream parlor in a shopping center might opt for a percentage lease to reduce initial costs and ensure they only pay more when their sales justify it.

Here is a complete guide on Types of Commercial Lease

Weighing the Pros and Cons: Choosing the Right Lease

Now that we’ve covered the different types of commercial leases, it’s crucial to weigh the pros and cons of each type. Here's a summary table:

Common Issues Tenants Face When Choosing a Lease

1. Unforeseen Costs: Some leases, such as the NNN lease, can lead to tenants underestimating the additional costs (e.g., property tax, insurance, maintenance).

2. Lack of Control: Leases like gross or IR leases limit tenant control over the property, which can be problematic if the landlord doesn’t maintain the building well.

3. Length of Commitment: Long-term leases like FRI leases can lock tenants into long agreements that might not suit evolving business needs.

Leasing vs. Buying Commercial Property: Which is Better for Your Business?

How Moeen & Co. Solicitors Can Help

Choosing the right lease for your business is crucial, and it requires careful consideration of your business's financial standing, growth potential, and operational needs. At Moeen & Co. Solicitors, we specialize in helping businesses navigate the complexities of commercial leases. Our experienced team can provide tailored legal advice, ensuring that you choose the right type of lease, negotiate favorable terms, and protect your interests throughout the lease term.

FAQs

1. What is the difference between an FRI lease and a gross lease?

• An FRI lease requires the tenant to cover repairs and insurance, while a gross lease includes all costs within the rent, making it more predictable but often higher.

2. Which lease is best for a startup business?

• A gross lease is often best for startups as it provides predictable costs without unexpected financial burdens.

3. Can I negotiate the terms of a commercial lease?

• Yes, it’s advisable to negotiate lease terms to better suit your business's specific needs, including rent, break clauses, and repair responsibilities.

4. What happens if I can’t pay the rent under a percentage lease?

• In a percentage lease, the rent adjusts according to your sales, but if you consistently underperform, it’s important to renegotiate the lease terms or explore exit strategies.

5. Why should I consult a solicitor before signing a commercial lease?

• A solicitor ensures that the lease terms are fair and that you fully understand your responsibilities, preventing future disputes or unexpected costs.