Understanding Commercial Leases (Deep Dive!)

A commercial lease is a formal agreement between a landlord and a business tenant to rent a property used for commercial purposes. This arrangement allows businesses to occupy and use commercial spaces, such as offices, retail units, warehouses, and factories, without owning the property outright.

In the UK, commercial leases play a crucial role in the business environment, serving as the foundation for the operations of small and large enterprises.

The significance of commercial leases in the UK stems from their flexibility and the security they offer landlords and tenants. For landlords, commercial leases represent a stable income stream and an investment in their property’s value. For tenants, they provide the opportunity to secure a location for their business operations, often tailored to their specific needs through negotiations on terms such as the lease duration, rent payments, and responsibilities for repairs and maintenance.

Commercial leases differ from residential leases in several aspects, including longer lease terms, negotiable rent and terms, and the allocation of maintenance responsibilities. They also tend to involve more complex legal and regulatory considerations, reflecting the diverse needs of commercial operations and the importance of the premises to the business’s success.

Understanding and effectively managing commercial leases in the dynamic UK business environment can be critical. They facilitate the physical space businesses need to operate and impact financial planning, legal compliance, and strategic flexibility. As such, prospective and current commercial tenants often seek to understand their rights, obligations, and the potential impacts of their lease agreements on their business’s future.

 

Section A: Legal Framework & Compliance

 

In the UK, commercial leases are subject to various legal considerations and compliance requirements that landlords and tenants must be aware of. These regulations ensure that properties are safe, fit for use, and comply with current legal standards. Here’s an overview of some key legal considerations and compliance areas:

 

1. Landlord and Tenant Act 1954

 

The Landlord and Tenant Act 1954 is a crucial legislation affecting commercial leases. It provides security of tenure for business tenants, meaning they have the right to occupy their premises after the lease expires and to request a new lease under certain conditions. This act allows for continuity of business operations but also includes provisions for landlords to oppose lease renewals under specific grounds, such as redevelopment plans or substantial breaches of lease terms.

 

2. Energy Performance Certificates (EPC)

 

Energy Performance Certificates (EPCs) are required whenever a property is built, sold, or rented. An EPC provides information on a property’s energy use and typical energy costs, along with recommendations on reducing energy consumption and saving money. For commercial leases, landlords must provide an EPC to potential tenants. Buildings are rated from A (most efficient) to G (least efficient), and there are minimum energy efficiency standards that commercial properties must meet before being leased.

 

3. Asbestos and Health & Safety Regulations

 

Landlords must manage asbestos in commercial properties, ensuring tenants and visitors are not exposed to asbestos fibres. This involves identifying asbestos-containing materials (ACMs) within the building and managing the risk by removing the asbestos, if necessary, or monitoring and maintaining ACMs safely.

Health and Safety Regulations are also paramount. They require both landlords and tenants to ensure the commercial premises are safe for employees, customers, and visitors. This includes regular inspections, fire safety measures, and adequate facilities and equipment maintenance.

 

4. Planning Use Classes

 

In the UK, properties are classified into different use classes, which determine the purposes for which they can be used without requiring planning permission to change their use. These classes are outlined in the Town and Country Planning (Use Classes) Order. Understanding the use class of a commercial property is essential because it impacts the types of businesses that can occupy the space legally. Sometimes, a change of use application may be required if a tenant wishes to use the property for a purpose outside its designated class.

 

Section B: Types of Commercial Leases

 

In the UK, commercial leases can vary widely to accommodate the diverse needs of businesses and property owners. The main types of commercial leases are distinguished by their terms regarding rent, maintenance, and insurance responsibilities.

Each type of commercial lease has its own set of benefits and drawbacks, and the choice between them depends on the negotiation between the landlord and tenant, considering the tenant’s business model, budget, and the specific property involved.

 

1. Full Repairing and Insuring Lease (FRI)

 

A Full Repairing and Insuring (FRI) lease is a standard commercial lease agreement in the UK, particularly suited to single-occupancy properties. Under an FRI lease, the tenant assumes full responsibility for the property’s maintenance, repairs, and insurance. This includes both the interior and exterior of the premises, as well as structural repairs. Essentially, the tenant must keep the property in good repair throughout the lease term and return it in that condition at the end of the lease, barring normal wear and tear.

The FRI lease shifts the burden of property upkeep and insurance costs from the landlord to the tenant, making it a preferred option for many landlords. It provides landlords with a relatively hands-off investment, as they can expect the property to be maintained at the tenant’s expense, ensuring its value is preserved or even enhanced over time without additional cost.

For tenants, while an FRI lease implies significant responsibility and potential expense, it often comes with the benefit of lower rent compared to other lease types that place more maintenance obligations on the landlord. Tenants entering into an FRI lease should conduct thorough due diligence on the property’s condition to avoid unexpected repair costs and negotiate lease terms that are clear about the extent of the repair obligations.

Both parties need to clearly understand what an FRI lease entails and carefully negotiate the terms to ensure they align with their expectations and capabilities.

Both landlords and tenants typically seek legal advice to navigate the complexities of FRI leases and ensure that the agreement is fair and balanced, protecting the interests of both parties.

 

2. Internal Repairing Lease

 

An Internal Repairing Lease (IRL) is a commercial lease agreement commonly used in the UK. It is particularly suitable for tenants of multi-occupancy buildings, such as office blocks or shopping centres. Under an IRL, the tenant is responsible for maintaining and repairing the leased premises’ interior but not the building’s external or structural parts. These external and structural responsibilities remain with the landlord, including the roof, external walls, and the building’s foundation.

The scope of an IRL typically covers fixtures, fittings, and the internal finish of the premises. Depending on the lease specifics, tenants might be responsible for internal walls, floors, ceilings, and sometimes windows and doors. On the other hand, the landlord takes charge of the building’s overall structure, ensuring the exterior and common areas are well-maintained, safe, and accessible.

IRLs are attractive to tenants because they limit the potential financial burden of extensive repairs on the building’s structure or exterior, which can be unpredictable and costly. This type of lease clearly distinguishes maintenance responsibilities, offering tenants protection against unforeseen expenses related to the building’s fundamental integrity.

For landlords, offering an IRL can make spaces within multi-tenanted buildings more appealing to potential lessees, as it simplifies tenants’ obligations and can expedite the leasing process. However, landlords must be prepared to assume the responsibility and costs of maintaining the building’s structural aspects and external appearance.

Both parties entering an IRL agreement must clearly understand the delineation of responsibilities to prevent disputes over maintenance and repairs. It’s often advisable for tenants and landlords to consult legal advice when entering an IRL to ensure the lease terms are transparent, fair, and reflective of their responsibilities.

 

3. Gross Lease

 

In the context of UK commercial property, a gross lease is a type of lease agreement where the tenant pays a single, all-encompassing rent amount that covers not only the rental of the space itself but also includes most, if not all, of the building’s running costs. These costs typically encompass property taxes, insurance, and maintenance expenses. The landlord is responsible for paying these expenses out of the rent received from the tenant. This lease type simplifies tenants’ budgeting, as they can anticipate their monthly outgoings more accurately without worrying about fluctuating operational costs.

Gross leases are less common in the UK commercial property market than other types of leases, such as Full Repairing and Insuring (FRI) or Internal Repairing Leases (IRLs). However, they can particularly appeal to small businesses or startups looking for predictability in their monthly expenses. By consolidating most property-related costs into a single payment, tenants can avoid unexpected charges that might otherwise arise from property taxes, building insurance, and maintenance works.

Offering a gross lease might be a strategy for landlords to attract tenants who prefer simplicity and predictability in their leasing arrangements. However, it also means landlords must carefully manage the property’s operational costs to ensure that the rent covers these expenses while still providing a return on their investment.

Tenants considering a gross lease must understand what is included in the rent and what additional costs they might be liable for, if any. Sometimes, costs like utility bills or janitorial services may need to be covered. As always, both parties should seek legal and professional advice when negotiating and entering into a commercial lease agreement to ensure their interests are adequately protected and obligations are clearly defined.

 

4. Net Lease

 

In the UK, a net lease is less commonly referred to by that specific term than in other markets, such as the United States. However, the principles behind it are still present in some commercial lease agreements.

A net lease in the UK involves an arrangement in which the tenant is responsible for paying the base rent and certain additional costs associated with the property. These costs typically include some or all of the property taxes, insurance fees, and maintenance expenses.

The specifics can vary widely, depending on the agreement between the landlord and tenant.

The concept of a net lease can manifest in various formats, including but not limited to:

• Service Charge: Tenants pay a proportionate share of the building’s operating costs, such as maintenance, security, and utilities, in addition to their rent.
• Insurance: Tenants may be responsible for directly purchasing or reimbursing the landlord for insurance costs.
• Maintenance and Repairs: Depending on the lease terms, tenants might be responsible for specific maintenance or repair tasks beyond the interior of their premises, potentially including structural repairs or external maintenance.

This arrangement provides transparency and predictability for the landlord regarding the property’s operational costs, ensuring the tenants cover them. While it can mean additional costs for tenants, it also offers potential for lower base rent and more direct control over the maintenance and operational aspects of their leased space.

Understanding these costs and responsibilities is crucial for tenants to avoid unexpected expenses and for both parties to maintain a transparent and equitable leasing arrangement. As such, it’s recommended for both landlords and tenants to seek professional advice when entering into a net lease agreement to ensure clarity and compliance with UK laws and commercial leasing practices.

 

Section C: Pros & Cons of Different Lease Types

 

1. Which Lease Type?

 

In the UK commercial property market, the chosen lease agreement type can significantly impact landlords and tenants, influencing financial, operational, and maintenance responsibilities.

When choosing a lease type, businesses must consider their financial stability, willingness to assume maintenance responsibilities, and need for operational control.

Startups or businesses looking for predictable costs prefer a gross lease, while more established businesses capable of managing a property opt for an FRI lease for its control and lower rent.

An internal repairing lease offers a middle ground, balancing manageable responsibilities with some cost predictability. Net leases, offering lower base rent but additional variable costs, may suit tenants with the capacity to manage these expenses effectively.

Each lease type serves different business needs and risk tolerances, so businesses must assess their priorities and capabilities before entering into a lease agreement.

Consulting with legal and real estate professionals can provide valuable guidance tailored to specific business situations and the complexities of the UK commercial lease market.

 

2. Pros & Cons

 

a. Full Repairing and Insuring (FRI) Lease
Characteristics: An FRI lease places responsibility for all maintenance, repairs, and insurance on the tenant. This includes both internal and external repairs as well as structural maintenance.

Pros:
• Landlords have minimal responsibility for the property’s upkeep, ensuring a more hands-off investment.
• Tenants have complete control over the maintenance and can ensure the property meets their standards.
Cons:
• Tenants face potentially high maintenance and repair costs.
• It requires tenants to take out insurance policies, adding to their expenses.

 

b. Internal Repairing Lease
Characteristics: Tenants are responsible for the interior maintenance and repairs of their leased space, while the landlord is responsible for external and structural repairs.

Pros:
• Reduced maintenance costs for tenants compared to an FRI lease.
• Suitable for tenants in multi-occupancy buildings where individual exterior maintenance is impractical.
Cons:
• Landlords retain responsibility for external repairs, which can be significant for older buildings.
• Ambiguities in lease terms about what constitutes ‘interior’ vs. ‘exterior’ repairs can lead to disputes.

 

c. Gross Lease
Characteristics: The tenant pays a single, inclusive rent that covers the lease and all property charges, including taxes, insurance, and maintenance.

Pros:
• Predictable costs for tenants, making budgeting easier.
• Simplicity in lease management for both tenants and landlords.
Cons:
• Typically, rent is higher than other lease types to cover the additional costs.
• Landlords assume the risk of variable maintenance and operational costs.

 

d. Net Lease
Characteristics: Tenants pay base rent plus additional expenses, such as property taxes, insurance, and maintenance costs. Variants include single-net, double-net, and triple-net leases, differing in the expenses covered by the tenant.

Pros:
• Lower base rent for the tenant.
• Tenants have some control over the costs for which they are responsible.
Cons:
• Additional expenses can be unpredictable and increase over time.
• Complexity in managing and accounting for multiple payments and responsibilities.

 

Section D: Key Terms and Conditions

 

In the UK, commercial leases are complex agreements with numerous terms and conditions that define the relationship between the landlord and the tenant. Understanding these key terms and conditions is crucial for both parties to ensure their interests are protected, and obligations are clearly defined.

Commercial leases’ complexity and long-term nature mean that the specific details negotiated and agreed upon can have significant financial, operational, and legal implications for both sides.

For landlords, a comprehensive understanding of the lease terms is crucial to safeguarding their investment and ensuring a steady income stream. It allows landlords to effectively manage their properties, ensuring that responsibilities such as maintenance, insurance, and repairs are clearly defined. This clarity helps prevent disputes and ensures that the property is maintained to a standard that preserves or enhances its value over time. Furthermore, understanding lease agreements helps landlords enforce lease terms, manage tenant relationships, and make informed decisions about property improvements or adjustments to lease terms in response to market changes.

For tenants, knowledge of the lease terms is equally critical. It provides a clear understanding of their rights and obligations, including rent amounts, payment schedules, duration of the lease, renewal options, and termination conditions. This understanding is critical to financial planning and budgeting, helping businesses manage costs and anticipate future expenses. Additionally, tenants need to be aware of their responsibilities regarding the maintenance and upkeep of the premises, any restrictions on the use of the property, and their ability to make alterations or improvements. A thorough understanding of these aspects can impact a business’s operational efficiency, ability to adapt to growth or changes, and legal compliance in areas such as safety and accessibility.

Moreover, understanding commercial lease terms allows both parties to negotiate more effectively. Tenants can negotiate terms that offer greater flexibility and security, such as break clauses or caps on future rent increases. At the same time, landlords can ensure that the lease terms protect their property and investment. Effective negotiation and a clear understanding of lease terms can lead to more sustainable and mutually beneficial landlord-tenant relationships.

Here’s an overview of some of the essential elements within a UK commercial lease:

 

1. Rent and Rent Review

 

Rent is the payment made by the tenant to the landlord for the use of the premises. The amount is usually agreed upon at the start of the lease.

Rent Review clauses allow the rent to be adjusted at specified intervals, typically every 3 to 5 years, to reflect current market conditions. Reviews can be upward only; meaning rent can only increase, or market review, allowing rent to increase or decrease based on the market rate.

 

2. Lease Term and Renewal Options

 

The Lease Term specifies the duration of the lease agreement, which can range from a few years to several decades for commercial leases.

Renewal Options may be included, giving the tenant the right to renew the lease for an additional term under specified conditions, which helps provide business continuity.

 

3. Repair and Maintenance Obligations

 

These clauses define who is responsible for maintaining and repairing the leased property. Responsibilities can vary significantly; in a Full Repairing and Insuring (FRI) Lease, the tenant bears the cost of all repairs and insurance, while under an Internal Repairing Leases limit, the tenant’s responsibility is to the interior of the premises.

 

4. Insurance Responsibilities

 

Insurance clauses outline the types of insurance coverage required and who is responsible for obtaining and paying for it. Typically, the landlord insures the building, while the tenant may be responsible for insuring their possessions and public liability insurance.

 

5. Subletting and Assignment Rights

 

Subletting allows the tenant to rent out part or all of the leased premises to a third party. The assignment involves transferring the lease to another party. Both usually require the landlord’s consent, which must be fairly held.

 

6. Break Clauses and Exit Strategies

 

Break Clauses allow the tenant or the landlord to terminate the lease early under specific conditions, providing flexibility to adjust to changing business needs or circumstances.

Exit Strategies involve planning for the end of the lease, including conditions for returning the property to the landlord and any obligations for repairs or reinstatements.

 

Section E: Negotiating a Commercial Lease

 

1. Tips for Effective Negotiation

 

Negotiating a commercial lease in the UK involves a careful balance of understanding legal requirements, market conditions, and the specific needs of your business. Here are some tips for effective negotiation and common pitfalls to avoid:

 

a. Understand Your Requirements

Clearly define what you need from the property, including size, location, layout, and any specific amenities or services. You will also need to be clear on your budget and long-term plans. Understanding your priorities and constraints will help you identify which terms are negotiable and crucial for your operation.

 

b. Research Market Conditions

Knowledge of the current market conditions, including average rent prices and the availability of commercial properties, can give you leverage during negotiations. Use this information to negotiate more favourable terms.

 

c. Professional Advice

Consider hiring a commercial property solicitor and a chartered surveyor. They can provide valuable insights into the lease terms, highlight unusual clauses, and advise on the property’s condition and valuation.

 

d. Negotiate Lease Terms

Focus on key terms such as rent, lease duration, break clauses, rent reviews, and repair obligations. Be clear about what is negotiable and aim for terms that offer flexibility and protect your interests.

Clarify which party is responsible for repairs, maintenance, and insurance. Negotiating a cap on repair costs or limiting the extent of your obligations can protect your business from unforeseen expenses.

Understand how and when rent reviews will occur. To provide stability, try to negotiate a predictable and fair method for calculating rent increases, such as linking them to an inflation index rather than market rates.

If your business model might change, ensure the lease allows for subletting or assignment under reasonable conditions. This can provide an exit strategy or an opportunity to adapt the use of the space as your business evolves.

 

e. Consider Future Needs

Think about your business’s future growth or potential changes in needs. To accommodate future changes, negotiate terms that provide flexibility, such as break clauses or options to renew the lease.

 

f. Seek flexibility

Negotiate lease terms that offer flexibility, such as break clauses and renewal options. This ensures the lease can adapt to changing business needs and market conditions.

 

g. Document Everything

Ensure all negotiated terms are documented in the lease agreement. Vague clauses can lead to disputes. A well-drafted lease outlines each party’s rights and obligations, reducing potential conflict.

 

2. Common Pitfalls to Avoid

 

a. Overcommitting Financially

Avoid agreeing to rent or lease terms that are unsustainable for your business. Consider your long-term financial projections and ensure the lease is affordable.

 

b. Ignoring Repair and Maintenance Obligations

Failing to understand and negotiate the extent of your repair and maintenance obligations can lead to unexpected expenses. Clarify these terms to avoid bearing the cost of extensive repairs.

 

c. Neglecting Break Clauses and Exit Strategies

You may be tied to a lease that no longer suits your business needs without a break clause. Ensure you have a clear exit strategy and understand the conditions under which you can terminate the lease.

 

d. Overlooking Rent Review Clauses

Rent review clauses can significantly increase your costs over time. Understand how and when rent reviews will occur and negotiate caps or limits on increases if possible.

 

e. Not Planning for Renewal

You must negotiate renewal options to leave your business with premises at the end of the lease term. Secure your ability to renew the lease under terms agreeable to both parties.

 

3. Role of Legal Advice

 

Negotiating a commercial lease in the UK is a complex process that involves understanding specific legal terms, financial implications, and the long-term impact these agreements can have on a business. Given these complexities, the role of legal advice cannot be overstated.

Legal professionals specialising in commercial property can provide invaluable guidance, ensuring the lease terms are fair, compliant with UK law, and aligned with the business’s strategic objectives.

 

a. Expert Guidance
Commercial property solicitors have the expertise to interpret and negotiate lease terms, ensuring they meet legal standards and protect your interests. They can identify potentially onerous clauses and suggest modifications to mitigate risks.

 

b. Regulatory Compliance
Legal advisors ensure the lease agreement complies with all relevant UK laws and regulations, including safety standards, planning permissions, and the Landlord and Tenant Act 1954. Compliance helps avoid legal issues arising during or after the lease term.

 

c. Negotiation Support
Lawyers can negotiate on your behalf, using their knowledge and experience to argue for terms that benefit your business, such as favourable rent rates, break clauses, and limitations on liability for repairs.

 

Section F: Case Studies

 

Understanding and successfully negotiating the terms of a commercial lease can profoundly impact business operations, sustainability, and growth. Below are generalised examples based on common UK commercial property market scenarios. These examples illustrate how effective negotiation and comprehension of lease terms can benefit businesses.

 

Example 1: Retail Business Expansion

A retail business owner was looking to expand into a prime shopping area. Initially, the proposed lease terms included a high rent and a Full Repairing and Insuring (FRI) lease, which would place all maintenance and insurance responsibilities on the tenant. By thoroughly understanding the market and leveraging the business’s strong financial position, the tenant negotiated a lower rent and a cap on annual rent increases. Additionally, the tenant negotiated a partial repair lease, limiting their responsibility to internal repairs only. This strategic negotiation allowed the business to expand into a desirable location while managing operational costs effectively, contributing to the store’s profitability and long-term sustainability.

 

Example 2: Tech Startup Flexibility

A tech startup, uncertain about its growth trajectory, was concerned about committing to a long-term lease. The initial lease proposal was for ten years with limited break options. Understanding the need for flexibility, the startup negotiated a five-year lease with the option to break in the third year. This provided an opportunity to reassess space needs without significant penalties. This flexibility allowed the startup to adapt to rapid growth by moving to a larger office when needed, supporting its development and scaling efforts.

 

Example 3: Manufacturing Company Reduces Costs

A manufacturing company faced high operational costs due to the extensive repairs required on their ageing leased facility. The lease was nearing renewal, and the company leveraged its long tenancy and the property’s condition to negotiate more favourable terms. They successfully shifted the responsibility for major structural repairs to the landlord and obtained a rent reduction in exchange for committing to another term. This negotiation reduced the company’s operational costs and ensured the facility would be adequately maintained for continued operations.

 

Example 4: Professional Services Firm Secures Stability

A professional services firm wanted to ensure stability for its operations and clients by securing a long-term lease. Initially, the lease included rent reviews that could significantly increase operational costs. Understanding the importance of predictable costs, the firm negotiated a fixed increase rate for rent reviews, aligning them with its financial forecasting. This foresight ensured financial stability and allowed for better long-term planning and investment in the firm’s growth.

These examples demonstrate the importance of effective lease negotiation and understanding lease terms. By focusing on their specific needs and leveraging their position, businesses can secure terms that protect their operational interests and contribute to their growth and success in the competitive UK market.

 

Commercial Leases FAQs

 

1. How are commercial lease costs determined?

Lease costs are typically determined by the property’s location, size, type, and market conditions. Rent is usually quoted per square foot per annum. Other costs may include service charges (for maintenance of common areas), insurance, and business rates, depending on the lease terms.

 

2. Can the rent be negotiated in a commercial lease?

Yes, rent is often negotiable. Factors such as market demand, the length of the lease, and the tenant’s financial strength can influence negotiations. To achieve favourable terms, it’s advisable to research comparable properties and consider professional negotiation support.

 

3. What is a rent review, and how does it work?

A rent review clause allows the landlord to adjust the rent at specified intervals, typically every 3 to 5 years. The review method (e.g., linked to market rent, a fixed percentage increase, or inflation) should be specified in the lease. Understanding and negotiating the terms of rent reviews is crucial to avoid unexpected increases.

 

4. How flexible are commercial lease lengths?

Lease lengths can vary widely, from short-term leases of 1-3 years to long-term leases of 10 years or more. Flexibility in lease length often depends on market conditions, the specific property, and the landlord’s and tenant’s preferences. Break clauses can also provide flexibility, allowing either party to terminate the lease under agreed conditions.

 

5. What are a commercial lease’s typical repair and maintenance obligations?

Obligations can vary significantly between leases. In a Full Repair and Insurance (FRI) lease, the tenant takes on all repair and insurance responsibilities. However, more limited responsibilities can be negotiated, such as in an Internal Repair Lease, where the tenant is only responsible for interior maintenance.

 

6. How is subletting or assigning a lease handled?

Subletting or assigning a lease typically requires the landlord’s consent, which cannot be unreasonably withheld. The lease should clearly outline the conditions and process for subletting or assignment. Understanding these terms is crucial as they affect your ability to transfer the lease if your business needs to change.

 

7. What happens at the end of a commercial lease?

The process at the end of a lease depends on its terms and any statutory rights. Tenants may have the right to renew the lease under the Landlord and Tenant Act 1954, or the lease may terminate. Dilapidations (repairs to restore the property to its original condition) are a common requirement and source of disputes at the end of the lease.

 

8. How are disputes resolved in a commercial lease?

Disputes can be resolved through negotiation, mediation, arbitration, or litigation, depending on the lease terms and the nature of the dispute. Many leases include clauses specifying dispute resolution procedures. Seeking early legal advice can help manage disputes effectively and avoid escalation.

 

9. What is a Full Repairing and Insuring (FRI) lease?

An FRI lease is one of the most common types. In this type, the tenant is responsible for all repairs and insurance for the property. Landlords often favour this type of lease as it minimises their responsibilities and ensures the property is well maintained.

 

10. What is an Internal Repairing lease?

An Internal Repairing Lease (IRL) limits the tenant’s responsibilities to maintain and repair the property’s interior. External repairs and structural issues remain the landlord’s responsibility, making IRLs more tenant-friendly, especially for small businesses or multi-tenanted buildings.

 

11. What are the differences between net and gross leases?

Net and gross leases represent different approaches to handling rent and operational costs. In a net lease, tenants pay a base rent plus a portion of the property’s operational costs, like taxes and maintenance. On the other hand, gross leases require the tenant to pay a fixed rent that includes these operational costs, offering more predictability for the tenant.