Types of Leases
This article presents the more common types of leases (lease agreements) that are used to create a
leasehold (less-than-freehold) estate. These different types of leases are distinguished primarily
by the method used to calculate rent payments.
In a gross lease, the tenant (lessee) is responsible for rent payments only. Rent may be paid in a lump sum, but it is more common for the tenant to make regular, recurring payments. The periodic rent payment is the same each time, and thus is known as a fixed rental payment. The landlord (lessor) is responsible for all other costs and expenses, including maintenance, insurance, taxes, and assessments. With commercial gross leases, utilities are usually included in the rent payments. On the other hand, responsibility for utility payments under a residential gross lease can fall to either the tenant or landlord, depending on the terms of the lease agreement. Gross leases are the most common type of residential lease.
A net lease is a lease agreement, usually long-term commercial or industrial, in which the tenant agrees to pay all or a portion of the property expenses in addition to periodic rent payments. It is called a net lease because the rent paid is "net" income to the landlord. A net lease is often abbreviated as "N lease". The term "net lease" applies generically to all types of net leases, including double-net and triple-net leases. In a double-net (NN) lease, the tenant (lessee) agrees to pay property taxes and insurance in addition to periodic rent, and the landlord (lessor) agrees to pay for property maintenance, assessments, and other expenses. In a triple-net (NNN) lease, the tenant agrees to pay all operating and property expenses in addition to periodic rent, including taxes, insurance, maintenance, utilities, and assessments. Triple-net leases are common types of commercial leases when entire buildings or complexes of buildings are leased; ground leases, rooftop leases, and long-term leases are also usually triple-net leases.
In a percentage lease, a commercial tenant pays a percentage of the business' gross income as rent, often in addition to a minimum fixed rental payment. The amounts of the minimum fixed rent and the percentage of gross income vary by location, type of business, and prevailing economic conditions and are items to be negotiated between the landlord and tenant. Note that a commercial net or gross lease may also be a percentage lease. Percentage leases are a very common lease type for retail businesses, such as those you would find at a shopping mall.
A ground lease is a type of commercial or industrial lease where the landlord rents raw or minimally improved land to the tenant, who constructs and occupies a building or buildings on the land. Usually, the tenant owns the building while the landlord retains ownership of the land. A ground lease is often a long-term, triple-net lease, with the tenant paying fixed rent on the land, as well as all operating costs and expenses for both the land and the building.
In a shell lease, the tenant leases a building that is not completely finished and agrees to finish the interior and install any necessary trade fixtures. A shell lease can also be a ground lease, with the landlord retaining ownership of both the building and land. Shell leases are often long-term and triple-net. Various terms and phrases are used to describe the degree to which construction has been finished, including cold shell, warm shell, vanilla shell, etc.
Any space owned by someone may be leased - including the roofs of buildings. In a rooftop lease, the tenant uses a rooftop space owned by the landlord to place communications equipment such as cell phone towers, satellite dishes, radio transmitters, etc. These leases are usually long-term.
Any lease containing a provision for rent increases or decreases during the lease period is called a variable lease. There are two primary types of variable leases: graduated and index leases.
In a graduated lease, specified rent increases or decreases are scheduled to occur on specific future dates. One reason for graduated leases is to allow a new commercial tenant time to establish a successful business and an assured revenue stream before rent increases occur. As one might expect, most rent changes under graduated leases are increases rather than decreases. However, graduated leases with future rent decreases do occur. An example is a seasonal, tourist-dependent business that is allowed to decrease its rent payments during off-season lulls in business.
Index Lease The other main type of a variable lease is an index lease, where the amount of the rent payments is tied to a financial index. Often, government-reported indexes which give information on certain sectors of the economy, such as the Consumer Price Index (CPI), are used. Rent payments may increase or decrease periodically in an index lease, according to the index selected and the terms negotiated in the lease agreement.
Oil, Gas, and Mineral Leases
An oil, gas, or mineral lease allows a tenant to explore for these commodities on land owned by the landlord. A flat fee is usually paid for the right to explore for oil, gas, or minerals, with an option to renew for another lease period. This option can last indefinitely until a well or mine is constructed. If mineral substances are located and extracted from the land, the landlord receives royalty payments in addition to rent payments. This arrangement continues as long as substances can be extracted. Most oil, gas, and mineral leases have a clause that allows the lease to expire if no materials are found.
A proprietary lease, like a ground lease, combines ownership (freehold) and lease (less-than-freehold) interests. In a cooperative apartment or condominium building, the premises are owned by a company or corporation. A tenant buys shares in the company, which allows him or her to live in the building but does not grant title to any specific unit; this is known as company title. A proprietary lease gives a tenant in a cooperative apartment or condominium the right to inhabit a particular unit. Under this type of lease, the lessee is known as the tenant-shareholder and the landlord or lessor (which is the company in which the tenant owns a share) is known as the owner-corporation. Proprietary leases are no longer in common use; they have been replaced with strata title, which grants ownership of a particular unit of an apartment / condominium building or complex to an individual (or group of individuals), with no lease necessary.
Agricultural Lease (Farm Tenure)
A tenant who leases a farm or other agricultural operation may pay a fixed rent (known as cash or standing rent), or he or she may negotiate with the landlord a percentage lease based on the gross receipts or profit from any crop or product. An agricultural percentage lease is known as a share lease or, more commonly, as sharecropping.
Sale and Leaseback
Sometimes, an owner of a property may decide that it is financially advantageous to sell the property to another, but continue to occupy the premises under a lease agreement. The former owner thus becomes the tenant of the new owner or landlord. This conversion of a freehold estate to a leasehold estate is known as "sale and leaseback".
Lease Purchase Agreement
A lease purchase agreement is essentially the opposite (or close to it) of a sale and leaseback. The tenant wishes to purchase the property but is unable to because of a lack of financing, a cloud on the title to the property, or the like. In a lease purchase agreement, a portion of the rent payment goes toward the purchase of the property and reduces the total amount necessary to purchase the property outright.
Article: Real estate
Added: Fri Jun 27 2008
Last Modified: Wed Oct 01 2008