Whether you’re the lessee or lessor, it’s essential to understand common terminology to negotiate lease agreements effectively.
Navigating lease management is challenging enough without the added complication of understanding commercial lease terms. Whether you’re the lessee or lessor, it’s essential to understand common terminology to negotiate lease agreements effectively. This glossary will help you quickly scan and find simple definitions for the lease terms that might cause you confusion.
A lessor or landlord legally owns the asset or property. They may be a person, company, or legal entity. They lease the property or asset by giving the lessee the right to use or occupy it for a specified period.
A lessee or tenant pays rent for the right to occupy or use the property. They may be a person, company, or legal entity.
A term sheet or offer to lease outlines the terms and conditions of the lease agreement in bullet points. It’s used to guide the drafting of the formal lease agreement and is commonly used during negotiations to determine key terms such as base rent, lease period, and incidental expenses.
Base rent is the set amount the lessee pays to the lessor each month to occupy the premise or use the asset. It typically corresponds to square footage. There may be additional rent to pay each month, which is outlined in the other terms of the lease agreement.
Gross lease agreements may be referred to in a few ways: full-service gross lease, full-service lease, or even FSG. Any of these terms refers to a lease agreement where the lessee pays a flat monthly rate to the lessor. This payment covers both base rent and incidental expenses, meaning the lessor takes care of any additional costs. Usually, the base rent rate is higher to mitigate the risk of unexpected costs for the lessor. It’s a simple lease agreement that’s easy for all parties to understand.
A modified gross lease or MG lease refers to a lease agreement where the lessor shares the cost of defined incidental expenses. The lessee pays base rent monthly and agrees to some of the operating expenses for the property or asset. For instance, they might pay for utilities such as heat or electricity in addition to base rent.
A percentage lease is most typical in a commercial retail lease agreement. It requires a lessee to pay a monthly base rent and a percentage of gross sales over a defined minimum amount.
A net lease or N lease is where the lessee pays the monthly base rent and one incidental expense (e.g. insurance, property tax, utilities, etc.). The lessor is responsible for all other incidental expenses in this type of lease. Depending on the lease agreement, the lessee can pay the additional cost directly or remit payment through the lessor.
A double net lease or NN lease is where the lessee pays the monthly base rent and two incidental expenses (e.g. insurance, property tax, utilities, etc.). The lessor is responsible for all other incidental expenses. Depending on the lease agreement, the lessee can pay the additional costs directly or remit payment through the lessor.
A triple net or NNN lease is where the lessee pays the monthly base rent plus all incidental expenses (i.e. property taxes and insurance, utilities, and other operating and maintenance costs). The lessor is only responsible for structural repairs to the property.
Incidental expenses on a lease agreement refer to the costs of operating and maintaining the property. They are costs added to the base rent that either the lessee or lessor must pay. Examples include property taxes and insurance, utilities, common area maintenance, and repairs.
Common area maintenance or costs (CAM) refer to an incidental expense usually found on lease agreements. They refer to the cost of maintaining common areas shared between tenants of a building and include expenses such as property management, concierge or reception, snow removal, cleaning services, and landscaping.
Additional rent refers to incidental expenses that the lessee is responsible for paying in addition to base rent each month.
TMI is a commercial lease agreement term meaning “taxes, maintenance, and insurance”. It’s commonly found on agreements where the lessee is responsible for paying some or all of the incidental expenses (i.e. net, double net, and triple net lease agreements).
ILA is a commercial lease agreement term meaning “independent legal advice”. It refers to the recommendation that both parties receive legal advice before signing. If either the lessee or lessor forgoes the option to obtain legal counsel, this clause upholds the lease agreement terms against claims of misunderstanding.
Trade fixtures refer to any items the lessee chooses to install, which can be taken with them when they vacate the property. Typically trade fixtures refer to furniture, inventory, and hardware. Lease agreements should clearly define any assets lessees plan to take when they leave. Usually, the clause specifies the lessee’s responsibilities for any damage removal or installation might cause.
Tenant inducement payments (TIPs) are incentives added to a lease agreement to encourage lessees to rent the property or asset. Payments vary and can be rent-free months, cash payments, moving expenses, allowances for fixtures or leasehold improvements.
A tenant improvement allowance is an amount given by the lessor to help pay for leasehold improvements or renovations. It usually refers to permanent changes a lessee wants to make to prepare the space for commercial use or the specific demands of their operations. Examples include flooring, lighting, drywall, etc. These payments are often used as tenant inducements.
Turnkey improvements are renovations that the lessor carries out when you sign the lease. They may be included as a tenant inducement in a lease agreement.
Subleasing or sublet clauses are used in commercial lease agreements when the tenant leases unused space to another tenant. The subtenant lease agreement is independent of the original lease agreement. Tenants cannot sublease unused space unless this clause exists to give consent.
An exclusive right or exclusivity clause is particularly important for commercial lease agreements. This clause gives the lessee the right to be the only provider of a particular product or service. For instance, in a shopping mall, a hairdresser might want exclusive rights to haircutting services in the building.
A rent escalation clause limits and defines rent increases. This clause is essential for lessees as it impacts the cost of tenancy over time. Depending on the lease agreement, there may be a predefined rent increase every few years or an annual increase of 2%.
A vanilla shell lease or whitebox condition refers to a property that is almost move-in ready. Usually, buildout costs have been taken care of by the landlord, and amenities exist. For example, you can expect to get the property with finished ceilings and restrooms, HVAC, and ductwork complete, lighting, and elevators. Base rent is higher when the property is in this condition.
A cold dark shell lease refers to a commercial space without amenities. It means that the area is down to the studs, and you will still need to complete HVAC, plumbing, elevators, etc. The advantage of a lease like this is that the base rent tends to be lower, and lessees can negotiate a generous tenant improvement allowance to assist in building out amenities.
Second-generation leases are commercial leases where a similar tenant previously used the space. They dramatically reduce buildout costs. For example, if the new tenant is opening a restaurant and the property was formerly a restaurant, the lease might include many amenities standard in a commercial kitchen. Similarly, medical facilities may seek out second-generation lease agreements where units were previously used for medical purposes as spaces will likely include appropriate ventilation, waste removal amenities, etc.
