The Legal Implications of Signing a Triple Net Lease

A triple net lease is a commercial lease in which the tenant pays the property’s real estate taxes, insurance, and maintenance costs, known as the three nets, in addition to base rent. They are most often used in freestanding retail and office buildings and in large single-tenant industrial properties, with terms that typically run 10 to 15 years. Because nearly every cost allocation in a triple net lease is negotiable, landlords and tenants should both understand exactly what they are taking on before signing.

What is a triple net lease?

There are many different types of commercial lease arrangements, each with its own advantages and disadvantages. Triple net leases are common because they offer benefits for both tenants and landlords.

In a triple net lease, the tenant is responsible for paying all of the landlord’s operating expenses, including real estate taxes, property insurance, and maintenance (the three nets), in addition to base rent and other fees. In exchange, tenants typically enjoy a lower base rent and greater control over the premises.

Gross vs. Net Lease

There are two primary types of leases, each with its own subtypes. A “gross lease” is where a tenant pays one lump sum for rent, and the landlord pays for any additional expenses, such as taxes, insurance, and maintenance. In a “net lease,” the base rent is generally lower, but the tenant is responsible for most (if not all) other expenses associated with operating the business. A “modified gross lease” is a combination of the two.

Features of a Triple Net Lease

As the name implies, a triple net lease, often referred to as a “NNN lease,” is a form of net lease. The term “triple net” refers to the three primary expenses that the tenant pays.

Along with base rent, the tenant is also responsible for the following in a triple net lease:

• Property Taxes: Tenants are responsible for paying their proportionate share of property taxes assessed on the leased space.
• Insurance: Tenants pay a proportionate share of the insurance coverage for the building.
• Maintenance Costs: Tenants are responsible for maintaining the property, including repairs and upkeep. This may include common areas like parking lots, sidewalks, or landscaping.

In addition, tenants may also be responsible for paying utilities, such as water, electricity, gas, and trash removal. These terms are typically negotiated in the lease agreement, along with provisions regarding who is responsible for replacing/repairing structural components of the building, such as the roof.

Triple net leases are often used in freestanding retail or office buildings, along with large, single-tenant industrial properties, where tenants want greater control over the property. They are often popular in sale–leaseback and build-to-suit transactions. Lease terms vary, but are typically between 10 and 15 years with a predetermined escalating rent.

Risks and Benefits of a Triple Net Lease

Landlords and tenants should fully appreciate the risks and benefits of a triple net lease. While some of the most important are summarized below, it is always advisable to work with an experienced commercial leasing attorney to determine the best option.

Benefits for Tenants

• Lower base rent
• Increased flexibility and control over expenses
• Greater ability to customize leased space
• Lower or no administrative fees.
• Ability to reduce tax burden by deducting property-related expenses

Risks for Tenants

• Operational expenses can fluctuate.
• Burden of property management
• Tax-related liabilities such as fines and penalties

Benefits for Landlords

• Predictable income
• Lower operational costs
• Tenant shoulders the burden/risk of managing taxes, insurance, and other costs

Risks for Landlords

• Lower rent revenue
• Greater risk of loss in the event of a default/vacancy
• Less control over maintenance

Negotiating a Triple Net Lease

When negotiating a triple net lease, tenants and landlords must be mindful of both the risks and benefits. For landlords, it is important to consider the predetermined escalating rent, the tenant’s creditworthiness, and any caps placed on operating costs paid by the tenant. Tenants should carefully evaluate their projected expenses and negotiate a base rent that reflects these added costs. Additionally, landlords and tenants alike should consider whether they will be responsible for the roof and structure of the property and what the costs may be should repairs or replacement be needed.

Finally, landlords and tenants should also carefully review all proposed terms of a commercial lease agreement. As discussed in greater detail here, provisions that require particular attention include lease assignment, sub-letting, defaults, remedies, indemnification provisions, and dispute resolution.

Work With an Experienced Commercial Leasing Attorney

Poorly drafted commercial lease agreements can result in costly and time-consuming disputes. Scarinci Hollenbeck’s commercial leasing attorneys have decades of shared experience negotiating all types of lease transactions, ranging from individual office leases to large lease portfolios. With offices in New York City and New Jersey, we are also equipped to represent our clients’ interests across the region.