The Different Types of Commercial Tenancies

The Different Types of Commercial Tenancies

May 21, 2018 by Sandra

Very few new businesses can be operated and grown from a spare bedroom. For those that can - great. You’ll be able to keep your overheads nice and low. Most companies though, at some stage, will need to find a premises. It’s an exciting time for a business. Looking for an office, warehouse, factory or shop. But it’s also a nerve-wracking time. Commercial property can be hugely expensive. Buy somewhere and the business is slow to take off? You could be in a lot of trouble. Which is why renting or leasing is so popular with business owners.

A commercial tenancy isn’t without its risks, though. Make a poor decision or choice and it can severely affect your business, your revenue and even your personal life. So in order to avoid making a big mistake you’ll come to regret, it pays to attack the market armed with knowledge.

Here’s our guide to the different types of commercial tenancies:

Commercial Lease

By far the most common form of commercial tenancy, commercial leases can get quite complex, so it’s easier to break them down into further subsections…

Net Lease

The most popular type of commercial lease, net leasing sees the tenant financially responsible for a large portion - or all - of any added fees incurred by their occupation of the building. So maintenance costs, taxes and utility bills are picked up by the business leasing.

There are more than one type of net lease, though. There are:

  • Single net leases: With these, the tenant only pays tax.
  • Double net leases: The tenant pays tax and insurance, but nothing else.
  • Triple net leases: As well as taxes and insurance, the tenant picks up the maintenance bill. To keep costs fair and affordable, triple net leases often have a lower basic rental value.

Gross Lease

The effective opposite of a net lease, a gross lease will see tenants pay a monthly fee and that’s it. All additional costs incurred are paid for by the landlord. Gross leases make budgeting easier and more predictable for the business in the property, but - understandably - come at a higher basic rate than net leases. In fact, they can quite often work out to be quite a lot extra per month as the landlord attempts to mitigate against large unexpected bills.

Percentage Lease

As you can imagine, a percentage lease is a kind of halfway house between net and gross leasing. The tenant pays a fixed ‘rental’ amount and then agrees to meet a percentage costs of the major bills (utilities, insurance premiums and any maintenance fees). The % can be anything, so long as it’s agreed upon by both parties and written up in the agreement.

Tenancy at Will

For shorter tenancies, one useful option is the ‘tenancy at will’. Nothing to do with last wills and testaments, this form of lease is perfect for short stays. The contract states no time period whatsoever, the only agreement is that both parties have to be happy to continue. So, the moment with the tenant or landlord wants to rip up the contract, they notify the other party and it’s ended (barring a notice period, of course - usually between one and six months). It’s as simple as that.

This type of lease offers a great deal of flexibility, but at the cost of any long-term assurance. A tenant is wise not to spend too much on decorating the property, as there’s zero guarantee of how long they’ll occupy it for.

Periodic Tenancy

This kind of commercial lease is usually seen at the end of an existing contract, but where both parties are happy to continue. A monthly or quarterly agreement is set up and the tenant stays in the building. This kind of agreement can also arise when a tenant moves in as a contract is being drawn up, but the contract never gets completed.

It’s effectively a rolling contract. Provided the rent is met and neither party finds reason to end the agreement, it can just carry on in this way indefinitely. It’s worth nothing that after a certain period of time, the tenant may become entitled to certain rights and privileges as per the Landlord and Tenant Act of 1954.

Licence to Occupy

Most tenancies stipulate that the owner may not simply ‘come and go’ as they please. Visits must be arranged and approved prior to happening. But not so with ‘licence to occupy’ tenancies. In fact, the landlord can occupy the premises as well as the tenant. So if the landlord and tenant are happy to cohabitate in the building, this is the agreement for them. It’s kind of like a licensor/licensee arrangement.

Whichever you opt for, it’s important to agree upon a contract that both parties are happy with. And that the tenant can afford. Moving into your own commercial place should be an exhilarating time, full of hope and promise. But, as ever in business, it’s wise to proceed with caution...

If you’ve found yourself in financial trouble due to a commercial tenancy that’s gone wrong, get in touch with us. We can help.

Filed Under: Tenancy

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