DOUBLE NET LEASE

Contact Neufeld Legal for commercial leasing legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

A Double Net Lease, often simply referred to as an "NN" lease, is one of the foundational structures used in commercial real estate to allocate the burden of property operating expenses between the landlord (lessor) and the tenant (lessee). It represents a mid-point between the most landlord-favorable lease type (Triple Net Lease) and the most tenant-favorable (Gross Lease).

In a Double Net Lease, the tenant is responsible for paying base rent and two of the major "net" expense components:

• Base Rent: The fixed monthly or annual rent agreed upon in the lease contract.

• Property Taxes: The tenant must pay a proportionate share of the property's real estate taxes. If the tenant occupies 50% of the building, they typically pay 50% of the property tax bill.

• Building Insurance: The tenant is responsible for paying the premiums for the building's property insurance (covering the structure, not the tenant's contents or liability).

In this commercial leasing arrangement, the landlord retains responsibility for the third major "net" expense:

• Maintenance and Repairs: This typically includes all structural repairs, roof, foundation, exterior walls, and often the maintenance of common areas (like parking lots and walkways) in multi-tenant buildings. Major capital improvements are also usually the landlord's responsibility.

Double Net leases are a popular choice, particularly in multi-tenant commercial properties such as:

• Office Buildings: Where the landlord prefers to maintain control over the overall building structure, common areas, and major systems (like HVAC).

• Shopping Centers or Malls: Where it is impractical to assign maintenance of common areas (Common Area Maintenance or CAM) to individual tenants, but taxes and insurance can be easily prorated.

Financial Implications and Benefits

The division of expenses under a Double Net lease creates distinct advantages for both parties:

For the Landlord

• More Predictable Income: By transferring the variable costs of property taxes and insurance to the tenant, the landlord secures a more stable net operating income, which simplifies budgeting and property valuation.

• Protection Against Rising Costs: The landlord is protected from unexpected increases in property taxes or insurance premiums, as these costs are passed directly to the tenant.

• Control Over Asset Quality: The landlord maintains control over major capital expenses, ensuring that maintenance and structural repairs are executed to their standards, thereby preserving the property's long-term value.

For the Tenant

• Lower Base Rent: The base rent for an NN lease is typically lower than the base rent for a Gross Lease because the tenant has assumed more of the operating expenses.

• Reduced Risk Compared to NNN: The tenant is shielded from the highly unpredictable and potentially high costs associated with major maintenance, repairs, or replacing large capital items (like a roof or HVAC system).

• Transparency: Tenants have a clearer understanding of the actual property tax and insurance costs, allowing for better cost control and budgeting for those specific line items.

For multi-tenant properties, the property taxes and insurance premiums are typically prorated among the tenants based on the percentage of the building's total square footage they occupy. The exact terms, including how the expenses are calculated and whether the tenant pays them directly or reimburses the landlord, are critical details that must be carefully defined in the lease agreement.

The Double Net lease provides a balanced approach, allowing the landlord to achieve a more stable financial return while limiting the tenant's exposure to the most unpredictable and large-scale maintenance expenses.

For knowledgeable and experienced legal representation in negotiating, reviewing and drafting lease agreements, and protecting your business’ legal rights thereunder, contact lease lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.