Modified Gross Lease is a type of lease where the commercial tenant takes the responsibility of a few operating costs such as utilities, interior maintenance by either the estimated expenses or actuals of the expenses. Commercial real estate leases can be of two types: gross lease or net lease. They primarily detail the responsibilities of the agreeing parties in matters relating to maintenance and upkeep expenses and other costs associated with the property under contract.
As we all know, Ground Lease or Land Lease is a type of contract where the parties are interested in transacting on land. Based upon the understanding between the Land Owner and Lessee, the terms and conditions of the lease vary. Multiple types of contracts are thus in practice to define and indicate the different terms and conditions.
Subordinated or Unsubordinated Leases define the ownership of improvement and mortgage conditions. However, in this article, we will be discussing the types of leases that decide the role of the parties for regular operational expenses.
A gross lease is also known as a full-service lease. Here, the landlord takes up the entire responsibility of payment of all associated expenses of the building or the property. These expenses usually include the insurance, property and local taxes, common area maintenance (CAM). It is in addition to all external repairs and maintenance.
A net lease is at the opposite end of the spectrum from a gross lease. Here, the tenant/lessee bears all or some of the expenses of the building or property. In a triple net lease (NNN lease), the tenant pays all the costs mentioned above.
Net leases usually preferred where a single-tenant occupies a premise, like a retail store or a restaurant chain.
Modified Gross Lease
A modified gross lease, also referred to as a modified net lease, stands somewhere in between a gross lease and a net lease.
Here, the tenant pays some of the buildings or property expenses. While the landlord takes up to pay the remaining costs, so here both the parties divide the responsibility between them for payment. And no single party remains responsible for all the operating costs. For Example, In a typical modified gross lease, the tenant may pay CAM costs while the landlord pays up taxes and insurance.
Where multiple tenants occupy a property or building, this type of real estate lease agreement is preferred. Single bill amongst the tenants could be divided in different ways. For example, let’s say the total water utility bill of a building with ten tenants is $5,000 a year. If there are no separate meters to measure usage, the tenants may pay either an equal amount of $500 each or proportional to the area that they occupy in the building.
Pros and Cons of a Modified Gross Lease
Pros to the Tenant
For a tenant, a modified gross lease can be attractive as it leaves the landlord responsible for the upkeep of the building. Thus tenants can concentrate on his business rather than deploying resources for maintenance too. Further, tenants get more control over whichever cost they are responsible for paying, given the terms of the lease.
Pros to the Landlord
For a landlord, a modified gross lease helps retain some control over their building or property. Here the landlord has no worries how his property is being taken care of, was proper and regular maintenance is happening in a manner desirable. Also, insurance and property tax payments are happening timely.
Cons to the Tenant
A modified gross lease may not be in tenants’ favour if the landlord is lazy or has little interest or indifference to the upkeep of the property. For instance, the landlord, who is responsible for taking care of the repairs and maintenance of the exterior of the property, may not do so as per the desired standard. It may be detrimental to occupants whom a pleasing surface is crucial to increase their appeal and sales to clients.
Cons to the Landlord
If the landlord underestimates the operating cost, especially CAM costs, it may result in a poorly maintained interior of the building. It can significantly add to the costs of maintenance and upkeep for the landlord once a tenant leaves.
This classification of the type of lease as a net lease, gross lease, or modified gross lease is a broad one. And a more in-depth study of the rental agreement is essential to ensure that one completely understands the terms laid down in it and their implications.1–4