Entering into a Triple Net Lease
Whether you are a landlord or tenant, entering into a triple net lease is a significant commitment with various risks.
A triple net lease is an agreement where the tenant is responsible for paying a portion of or all expenses of the property including, but not limited to, real estate taxes, insurance, and maintenance.These expenses are in addition to base monthly rent and additional rent, such as utilities.In most cases, the landlord is responsible for larger expenditures such as the roof or foundation of the building, however, in some cases, even these costs are passed on to the tenant.
From a tenant’s prospective, when negotiating and entering into a triple net lease, it is important to complete its due diligence and make a thorough inspection of the property including equipment.It is also important to understand what is covered in each clause, especially the maintenance clause.A critical distinction must be made between ordinary interior repairs and what is a capital expense for the property that is useful for years beyond the lease term.For example, a tenant does not want to enter into a triple net lease and the next month be told that two HVAC units need to be replaced at the tenant’s expense.A solution for the tenant would be to agree to maintain the HVAC unit with a service contract, but repairs above a certain amount are the expense of the landlord.As another example, a tenant in a multi-tenant building must negotiate for maintenance expenses that are proportionate to its leased space in the building.Further, for shorter term leases, the tenant’s share to pay for building improvements should not be based on total replacement cost, but should be limited to the proportionate share of the remainder of the lease term.
As a landlord, a triple net lease provides an opportunity for the landlord to shift some of the expenses of the property onto the tenant, as the tenant is responsible for virtually all of the day to day maintenance and management responsibilities.The landlord should seek a creditworthy tenant who is going to appropriately care for the property.In the unfortunate event the tenant is not properly maintaining the property, landlord must have a remedy and either hold the tenant in breach or make the repairs at the expense of the tenant and collect the expense as additional rent.
While these observations offer just a few insights, each lease should be appropriately crafted to meet the needs of the specific landlord and tenant in either a single or multi-tenant property.Above all, it is most important when entering into and drafting a triple net lease to ensure that the language of the lease is as clear as possible to avoid future disputes.No standard lease form addresses the needs of every lease.
Our firm has significant experience drafting and negotiating triple net leases on behalf of both tenants and landlords.An attorney-reviewed and prepared agreement will provide strong protections for landlords and tenants.Neither the tenant nor the landlord wants litigation, and a clearly-written lease will avoid drawn-out disputes and the legal fees associated with litigation.We are here to bring clarity.