What is a Gross Lease vs a Net Lease?
A Gross and a net lease are fundamental concepts opposing each other. Depending on the individual economic condition and the positions of the landlord and tenant, there can be a wide variety of unique intermediate possibilities for establishing the composition of the rent.
In a gross lease, the landlord receives the agreed rent and pays all or most of the operating expenses and taxes on the property. With a partial-a gross lease, the landlord and tenant share the costs in the proportion specified in the lease. Finally, in a net lease, the tenant pays all or most of the expenses in addition to the agreed rent.
What is meant by gross rent?
Gross rent is also called all-inclusive or inclusive rent. All ancillary costs are included in the gross rent. There are no additional costs for the tenant. The landlord does not have to prepare a service charge statement.
What is net rent?
Most leases include net rent. With a net rent, the tenant pays a basic rent, to which the operating and ancillary costs incurred are added as an advance payment according to a distribution key. At least once a year, the landlord must provide an accurate account statement.
Can the landlord increase the gross rent?
Increasing operating costs in a gross rent cannot simply be passed on to the tenant; the landlord only has the option of increasing the rent.
All-inclusive: the gross rent
If no operating and ancillary costs regulations have been agreed upon in the rental agreement, this is referred to as gross rent, also known as all-inclusive rent. The same applies to verbal rental agreements without regulations on operating costs. For the tenant, this means he no longer has to bear any costs over and above the agreed rental amount. This also means that there is no service charge settlement.
Consumption-based heating and hot water costs
Heating and hot water costs are an exception to this rule: If these are billed based on consumption by the Heating Costs Ordinance, § 6, then the costs are added to the rent as a lump sum, advance payment, or subsequent payment. In this case, the gross cold rent is also referred to as partial inclusive rent.
Rising service charges for gross rent
Paying rent as gross rent has various consequences. For example, rising operating costs cannot simply be passed on to the tenant; the landlord only has the option of increasing the rent – within the limits of the law:
The tenant must receive a written request to agree to the increase in the local comparative rent.
A rent increase is only permitted every 15 months (annual lock-up period).
The landlord must adhere to the local relative rent.
If the increase is calculated within the framework of a rent index, the exact ancillary costs included in the gross rent must be calculated and added to the rent index.
Within three years, the rent may only be increased by 20% or 15% (capping limit).
The cap limit under the German Federal Code: In cities and municipalities where the adequate housing supply is at risk, rents may only be increased by 15% within three years. Which areas these are is determined by the respective state government.
Decrease in operating costs for gross rent
If the total amount of the operating costs decreases, the landlord must also reduce the gross rent accordingly and without being asked to do so. However, since no annual service charge statement is issued when a gross rent is agreed upon, tenants should try to obtain an overview of the actual costs, for example, by asking fellow tenants or neighbors who have decided on a net rent.
In principle, the tenant can assert a claim for information. However, they must provide concrete evidence as to why a reduction in ancillary costs is expected. It is not sufficient to refer to a table of operating expenses.
Net rent is the rule
Due to increased transparency and more exact invoicing possibilities, net rent is far more frequently used in rental agreements than gross rent. In this situation, the running and extra costs are added as an advance payment to the tenant’s basic rent using a distribution key.
At least once a year, the tenant is billed in detail and must either make additional payments or receive a credit note, and the ancillary costs are adjusted for the following year. There are different permissible options for apportioning the operating costs to the tenant. Which option is chosen must be stated precisely and unambiguously in the rental agreement:
If all reasonable operating costs are stated in the rental agreement, the tenant must also pay them. However, only if chargeable costs have arisen and the items belong to the operating expenses;
If individual operating costs are listed explicitly in the contract or ticked from the operating costs catalog, only these may appear in the statement;
Preliminary agreements such as “The tenant must pay all incidental costs incurred” are just as invalid as agreements on the payment of house fees or property charges.
Tip: If there is a dispute about the operating costs and the type of billing, the landlord has the burden of proof. He must prove that the billing method corresponds to the contractual agreement.
Using different bases – a net lease or a gross lease in determining the level of rent and the choice of a particular option – is ultimately the result of negotiations between the landlord and the tenant. However, it should be noted that the lessee may benefit from additional rent calculations in different situations.
The following principle should be adhered to: expenses should be incurred if you are confident that you can control them. For example, if you are the tenant of an entire building, it may be more appropriate to assume the costs of maintaining the facility and paying for utilities. On the other hand, if the lease object is a small room in a business center, such a policy is unlikely to be justified.
In-office centers, as a rule, rents are set based on the principle of “distributed rent”: most of the operating expenses (cleaning, maintenance, and security) are included in the rent, while the tenant himself pays a smaller portion (such as electricity costs).