Gross Leases 101: What Every Business Tenant Should Know

Commercial leases differ significantly from residential leases, offering broader terms, longer durations, and far more negotiability. Among the most common lease structures in commercial real estate is the gross lease, frequently used in office buildings and multi-tenant properties.

Unlike residential leases, a gross lease typically outlines a clear division of financial responsibilities—but the exact structure can vary. These leases often simplify certain obligations for tenants, but it’s important to understand how the specific terms are defined.

There are several variations of gross leases, each with its own approach to how costs like maintenance, insurance, and property taxes are handled. The following sections explore the key types of gross leases and how they impact both landlords and tenants.

1. Gross Lease/Full-Service Lease

• Tenants pays base rent and utilities.

• Landlord pays all building expenses, including maintenance costs, insurance, and real estate taxes.

• Tenant may pay for additional expenses after the base year.

• This type is mostly preferred for the properties occupied by multiple tenants, like office buildings.

A full-service lease (also known as a gross lease), is commonly used for commercial properties such as office buildings.

According to this type of agreement, the tenant pays base rent and utilities while the landlord pays for all building expenses, including maintenance, taxes, insurance, repairs, and other costs. The tenant only must make one payment each month and the landlord take care of everything else. Due to its simplicity, a full-service lease is ideal for tenants. They can predict exactly what their expenses are going to be and not have unexpected expenses.

The disadvantage of this type of agreement for tenants is that they are completely dependent on the landlord when something needs to get fixed.

Besides that, in these leases, landlord takes the risks into consideration such as major repair or a sudden increase in maintenance costs, as they take all responsibility for the building. As a result of having all the responsibility on the landlord, the base rent is generally higher than that of other types of leases.

Sometimes, a full-service lease agreement may have a stipulation limiting the amount a landlord is required to pay. If the expenses exceed that amount, the tenant will be responsible for paying them.

Similarly, a full-service lease agreement may have that cap the amount the landlord will cover in operational expenses after the base year. The base year is the first year of occupation and generally sets the base rent amount for the following years.

2. Modified Gross Lease

• Tenant pays base rent, plus a portion of operating costs.

• Landlord pays the other portion of operating costs.

•  parties' obligations determine by negotiation.

• It is very highly common.

Modified gross leases is a combination of a net lease and a gross lease. It is like a gross lease in that a base rent, utilities and a portion of operating costs, as one lump sum, are paid by the tenant, the landlord pays the rest of the operational costs.

However, the exact payment amount is negotiated by parties. The tenant's payment could include any or all the three nets.

It is highly preferred because it has the simplicity of a gross lease but has the flexibility to determine the responsibilities of the landlord and tenant. In fact, most commercial leases could fall under this category, as both the landlord and tenant pay some of the operating expenses.

3. Percentage Lease

• Tenant pays base rent, and a specified percentage of gross income, which is usually around 7 percent.

• Landlord pays some or all the property taxes, insurance, and maintenance fees.

• It is common to use for retail space.

These types of leases are typically used with retail spaces such as restaurants and retail stores in malls and shopping centers. In this agreement, the tenant pays base rent and a specified percentage of their gross income, which is usually around 7 percent. The landlord pays some or all of the maintenance costs, insurance, and property taxes.

A percentage lease differs from the rest because the company’s success determines how much the tenant will pay.  Usually, these agreements start with a base rent, and the tenant begin to pay the percent amount after reaching a certain level of income called the “breakpoint.”

To offer lower base rent is the one of the advantages of this lease   since the tenant pays a percentage of his income. The other advantage is that the landlord is paid more if the tenant could get higher income.