GROSS LEASE

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

A Gross Lease is a commercial real estate leasing arrangement where the tenant pays a single, fixed rental fee, and the landlord assumes responsibility for virtually all of the property's operating expenses. This structure is the most tenant-favorable in terms of administrative burden and expense predictability.

In a pure Gross Lease, the tenant is responsible for only one component, namely Base Rent, which is a fixed monthly or annual amount established in the lease contract. This rent figure is calculated by the landlord to cover the cost of the space plus an estimated amount for all operating expenses, ensuring the landlord achieves their desired net income.

The defining characteristic of the Gross Lease is that the landlord retains financial and administrative responsibility for all three primary categories of "The Nets," plus utilities and general building operations:

• Property Taxes: Real estate taxes associated with the property.

• Property Insurance: Insurance premiums for the building structure and common areas.

• Common Area Maintenance / Operating Expenses: All costs related to the upkeep, repairs, and management of the property (including janitorial services, landscaping, roof, foundation, HVAC maintenance, etc.).

• Utilities: Often, the landlord pays for all standard utilities (electricity, water, gas) used within the common areas and often within the tenant's premises, which is why this type of lease is sometimes referred to as a "Full-Service Lease."

As with any commercial lease arrangement, these generic forms of leasing arrangements are subject to specific alteration by the landlord, with common variations of gross leases including:

• Full-Service Gross Lease: This is the most common form, where the landlord covers all operating expenses, including most utilities and routine janitorial services.

• Modified Gross Lease: This variation introduces an element of risk-sharing. The landlord pays all operating expenses up to a certain point, typically based on the costs incurred during a "Base Year" (the first year of the lease). If operating expenses increase in subsequent years, the tenant is required to pay their pro-rata share of those increases only. This hybrid is very common in multi-tenant office buildings.

Implications for Landlord/Investor and Tenant

For the Tenant (Lessee): The Gross Lease offers maximum predictability, which is its greatest advantage. The tenant can budget for a fixed, all-inclusive monthly payment without having to track volatile costs like utility usage spikes, sudden increases in property taxes, or unexpected HVAC repairs. This simplicity is highly valued by smaller companies or those prioritizing core business operations over property administration. The primary disadvantage is that the base rent is typically higher to cover the landlord's cost risk.

For the Landlord (Lessor): This structure carries the highest level of risk for the landlord, as they absorb the volatility of all operating expenses. If property taxes or insurance premiums jump unexpectedly, the landlord's net operating income is directly reduced. However, landlords benefit from a higher base rent and the ability to maintain greater control over building maintenance standards and service contracts. They must exercise diligent expense management to maintain profitability..

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.