Gross Lease vs. Net Lease

In a gross lease, the tenant pays a single amount and the landlord pays the expenses, whereas in a net lease the tenant pays a net amount to the landlord and the tenant pays the expenses.

Gross Lease

A lease of property under which the lessee pays a fixed rent and the lessor pays the taxes, insurance, and other charges regularly incurred through ownership; also called a fixed or flat lease. In a net lease, the lessee pays some or all of the operating expenses. Most residential and commercial office leases are gross leases. Most residential ground leases and commercial and industrial building leases are net leases.

Net Lease

A lease, usually commercial, in which the lessee not only pays the rent for occupancy but also pays maintenance and operating expenses such as taxes, insurance, utilities, and repairs. The rent paid is ‘net’ to the lessor. This kind of lease is popular with investors who want to obtain a steady stream of income without having to handle the problems associated with management and maintenance. Commercial or industrial leases, ground leases, and long-term leases are typically net leases.

Because the common interpretations given to the term net lease are so broad, it is essential to review the lease document to determine what expenses the tenant is to pay. In a true net lease, the tenant is responsible for expenses relating to the premises exactly as if the tenant were the owner. Examples of such expenses are real estate taxes; special assessments; insurance premiums; all maintenance charges, including labor and materials; cost of compliance with governmental health and safety regulations; payment of claims for personal injury or property damage; and even costs of structural, interior, roof, and other repairs.  It is helpful to distinguish between the net rent, called base rent, and the total of base rent and expenses, called effective rent.

Strictly speaking, the term triple-net lease is redundant because ‘net lease’ adequately describes the situation. Rather than rely on labels, however, the parties must examine the provisions of the lease to discover the extent of the tenant’s responsibilities.