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.
Gross Lease
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.
Net 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.
Percentage Lease
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.
Ground Lease
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.
Shell Lease
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.
Rooftop Lease
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.
Variable Lease
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.
Graduated Lease
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.
Proprietary Lease
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
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