The Ultimate Guide to Triple Net Lease Properties
Leases designated as “triple net” provide the proprietor with net profitability, as the name suggests. In other words, this type of agreement transmits all of the tenant’s charges, including those that normally accrue to the real estate owner. The mentioned charges can be major repairs, upgrading work, insurance coverage, management fees, or simply a tax. This agreement is ideal for the landlord if it is clear and well-detailed, as it allows you to reimburse all operating costs of his building if these specific things have been agreed and documented in the lease agreement.
Article 1851 of the Civil Code of Quebec (“C.c.Q”) defines the lease and provides that: a lease is a contract by which a person, the lessor, undertakes towards another person, the lessee, to procure for him, in return for a rent, the enjoyment of property, movable or immovable, during some time. The lease is for a fixed or indefinite term. Thus, the basic conditions of any lease are the rent, the enjoyment of a good as well as the duration, this last condition being able to be indefinite.
Unlike residential leases, in commercial leases, the C.C.Q. only applies on a supplementary basis. Thus, the parties to a commercial lease are free to agree among themselves on stricter or more flexible rules than those provided for in the C.C.Q.
The different lease types
There are several expressions to define the different classes of commercial leases. The most recurrent classes seen are:
The gross lease,
The net lease,
The double net lease (supra net or net net) and
The triple net lease (hyper net or net net net).
The definitions of what constitutes one or the other of these types of leases are more vague than precise and, above all, far from being uniform. However, the main consistency of their definitions lies in the distribution between the tenant and the landlord of the assumption of the costs (also called expenses, charges or operating costs) related to the building covered by the commercial lease.
The main expenses to be negotiated are:
energy costs,
management fees,
housekeeping,
capital tax,
professional fees,
taxes for the properties,
maintenance and repairs and
insurance costs.
These various expenses are generally established in proportion to the area rented in the building covered by the commercial lease. In some cases, the factorization of common spaces can have an impact that should not be overlooked. Indeed, a portion of the expenses related to common areas can be added to the rent. This portion will usually be inserted by adding to the leased area a fictitious area varying from 10 to 15% of the leased area.
1. The gross lease
In such a case, the tenant has only one amount to pay, namely the “gross” rent. Article 1864 C.C.Q. provides that the tenant is also responsible for “minor maintenance repairs,” except those resulting from the obsolescence of the property or force majeure. Since the expression “minor maintenance repairs” is not defined therein, the parties must refer to case law to understand what is included in this category. In order to minimize any possible conflict between the landlord and the tenant, it would be wise to define these “minor maintenance repairs” in the lease.
2. The net lease
If we talk about the net lease, we understand that a tenant covers an amount for the base rent enhanced by one or a few categories of expenses indicated above, generally taxes for the properties.
3. The double net lease (supra net or net net)
Here, the tenant pays the same amount as in a net lease, to which are added the costs related to major repairs, for example, a change of roof.
Once again, the landlord and the tenant have an interest in specified in the lease who will be responsible for the anticipated repairs, especially in the case of an old building. The extent of the repairs, their costs and the duration of the lease will be determining factors to consider.
4. The triple net lease (hyper net or net net net)
In the latter case, the tenant pays everything provided for in a double net lease in addition to insurance costs and often other expenses (heating or air conditioning system, upgrading to environmental standards, etc.).
Finally, regardless of the type of lease, special attention must be paid to the issue of leasehold improvements. Indeed, if the lessor has financed them and part of the base rent is intended to reimburse them, at the end of the lease, within the framework of negotiations for the renewal, it will be necessary to ensure that this portion of the rent is deducted.
To analyze
The net net net lease also called the triple net is an ideal contract for the lessor. Clear and well detailed, it allows the owner to recover all of his operating expenses for his building, even administration costs, salaries and external accounting costs if the charges are described in the lease. It is possible that the latter will recover up to 15% in administration fees on all his expenses. The lease is called “net net net” since the lessor receives as “actually net” profit the cost of the square foot rented to the tenant.
It is framed in this type of contract that all the tenants end up paying all the expenses related to the building concerned. As a general rule, mentioned expenses are assumed by the tenant according to the proportion of square feet he occupies. During the drafting of a real estate lease, it is important to ensure that different parties get along well and that they have previously defined what is included in “the triple net.”
Conclusion
The vocabulary of commercial leases is frequently approximate, subject to interpretation, and not well distinguishable. Despite the classes of leases mentioned above, the qualification of a commercial lease is always based on its text and not only on its title. It can even happen sometimes that the title is misleading. Thus, the parties have an advantage in providing clear clauses, particularly with regard to the distribution of expenses. As with any contract, but particularly in the case of commercial leases, the parties would be advised to read all and each of the financial provisions of the proposed lease before committing to its terms.
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