Triple Net vs. Gross vs. Modified Gross Leases [Pros & Cons]

When it comes to real estate transactions many documents are used to facilitate interactions and to conclude deals between the parties involved and one of such documents is a commercial lease or a lease. They are of different types but the common ones are triple net leases, gross leases, and a modified gross lease. A lease agreement is a contract document between two parties, a lessor (landlord) and a lessee (tenant). It sets the rules of engagement between them and it covers the lifespan of the tenancy agreement. 

By law, a tenancy is not legitimate until a commercial lease has been signed off by the landlord and the tenant. In this article, we will explore the differences between a triple net lease, a gross lease, and a modified lease so you can decide on an appropriate option for your next agreement with a prospective tenant.

1. Gross Lease 

A gross lease, also known as a full-service lease, is an agreement where the tenant actually pays a fixed rent which is monthly, and the landlord actually covers all building-related expenses. These expenses often include property taxes, insurance, utilities, and maintenance. The landlord takes on the operational costs, making it an all-inclusive arrangement. Tenants enjoy the convenience of a single monthly payment that covers rent and additional costs, such as amenities, providing a predictable cost structure for the duration of the lease.

Pros of Gross Lease 

• It benefits the tenant immensely as they will not have to cover extra expenses accrued during the year. This allows them to plan their budget easily.
• The tenant only gets to pay the base rent 
• Tenants only focus on running their business or paying the rent for the house 
• It allows the landlord to charge a higher rent since he will be responsible for paying everything else

Cons of Gross Lease 

• It places more responsibilities on the landlord 
• It is not an ideal option for landlords looking to earn passive income 
• Some tenants may be at a disadvantage because they will have little say on how the property is maintained 
• The rent tends to be much higher for the tenant

2. Modified Gross Lease

A modified gross lease is similar to a gross lease but with slight changes. It is designed to cater to the unique needs of the landlord in question.  With this arrangement, the tenant will pay a base rent at the beginning of the lease while also covering part of the operating costs of the property.  The operating cost they will cover will be calculated at the end of the year and it fluctuates. The landlord only covers the cost of property maintenance and a few operating costs such as property taxes and the common utility area.

Pros of Modified Gross Lease

• This lease places less responsibilities on the landlord as the tenants take care of maintenance. Landlords can also save money as they don’t have to pay for janitorial services 
• It affords tenants more control over the state of the property.

Cons of a Modified Gross Lease 

• While the landlords have less responsibilities, they have less control over their properties 
• Landlords cannot inadvertently increase maintenance costs or decide on the services to hire.

3. Triple Net Lease 

A triple net lease is by far the most popular type of lease agreement in real estate because of its flexibility. Under triple net leases, landlords and tenants enjoy varying degrees of control. Under this arrangement, the landlord shares the running cost of the property with all the tenants occupying the property on a pro-rata basis. It is generally the opposite of a gross lease and they are of two types.

Single Net Lease: The single net lease places the rent and property taxes at the door of the tenant. They pay for the cost associated with their space while the landlord takes care of general expenses.

Double Net Lease: The tenant is responsible for the base rent and the operating costs such as insurance and property taxes. The landlord covers any maintenance and repair costs. It is quite common among multi-tenant properties where the individual tenant only pays for the space they occupy.

Pros of Triple Net Lease 

• It is investor-friendly 
• It is a very good passive income model
• There is very little day-to-day management of the property by the landlord 
• Great for tenants because of the low base rent since they pay the expenses 

Cons of Triple Net Lease 

•  Landlord have very little control even when repairs are required 
• Landlords are not involved in the daily running of the property.

What Are the Benefits of Triple Net, Gross and Modified Gross Lease for All Parties?

These leases have their benefits and drawbacks for both parties to a certain degree. For tenants who own businesses, a triple net lease is best as they don't have to invest capital into building or acquiring a building of their own. Rather, they rent the space for a period. The tenant handles all maintenance costs and it gives them complete control over the property. Landlords will still retain ownership of their assets while keeping it in good condition.

As for gross and modified leases, the tenant has less control but also has to worry less about how the property will be maintained as the landlord takes care of all expenses. All the tenant has to do is cover a percentage of the expenses at the end of the year. While gross and modified leases are similar, the landlord can tweak the latter for a better outcome.

Drawbacks of Triple Net Lease, Gross Lease as well as Modified Gross Lease 

Triple net leases contain significant risks such as higher taxes on the property as well as insurance which will be borne by the tenant. The final amount is never constant but is still a significant outlay. The tenant also has to cover all maintenance costs pertaining to the building. Furthermore, should injuries or any incident occur during or after maintenance has been done, the tenant bears the cost. 

As for the modified gross lease, the landlord has the full right to increase the running costs when deciding on the rent. This places the tenant in a difficult situation if they are dealing with a dishonest landlord who decides to spend less on maintenance. In the case of a business, this will affect the tenant’s productivity.

Extras Used in Association with Leases 

The reason why leases are even a thing with real estate transactions is more of a preventative measure rather than a reactive one. Leases are used to uphold the rights of landlords and tenants. They are also used to ensure fewer disputes during a tenancy year. Each party knows what is expected of them and knows what the sanctions are should they default.

However, in addition to leases, landlords can demand security deposits to protect themselves from potential losses.  In most cases, deposits are requested alongside the first-ever rent. This ensures that the tenant pays their rent on time otherwise the lease is breached. When requesting a deposit as a landlord, here are some things to keep in mind.

• The amount must be specified in the contract as well as the attendant terms
• The circumstances under which the deposit is collected 
• The conditions that must be met before the deposit is returned 

In some contracts, the landlord can specify that the deposit can be used as a rent payment for the last month of the lease period or to compensate for losses. There is always wiggle room in the contract to make a determination on what the deposit should be used for if it will not be returned.

Furthermore, extra clauses can be put in the lease to protect the landlord.  For instance, the tenant may be made to return the property to its original condition before their arrival because wear and tear is more than likely. The tenant must also be asked to remove all their belongings from the premises once the tenancy expires. These are safety measures to protect the landlord from disputes such as loss of personal property in the future. If a dispute arises, the landlord can set an amount to be paid in advance and then ask the tenant to pay the rent for the last month in advance as well. If this is the case, the landlord can draw up a new contract with the tenant and keep all associated documents in line with legal protocols.

Conclusion

A triple net lease, modified gross lease, or gross lease allows landlords to safeguard their assets and maintain financial accountability. These lease types clearly define the obligations of both the landlord and tenant, providing transparency in terms of costs and maintenance. They benefit tenants by offering structured terms, and they remain in effect for the entire lease period, ensuring long-term stability for both parties and a well-maintained property environment. Understanding the differences between these leases helps both landlords and tenants make informed decisions about their rental agreements.