Should I Sign a Triple Net Lease? OG Realty Group

When it comes to commercial real estate, extra care is critical before signing anything at all. Real estate documents are legally binding, and you always want to know what you are agreeing to before you commit. This is equally true when leasing a property as it is when buying or selling. In this post, we’ll talk about whether it’s ever a good idea to sign a triple net lease.

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What Does Triple Net Mean in a Commercial Lease?

When planning a new venture, one of the first things you might do is Google “What does triple net lease mean?” Or, if you’re the type of person who thinks in abbreviations, “What does NNN in real estate mean?”

In simple terms, a lease is just a rental agreement, whether for a commercial or residential property. The division of expenses between the tenant and the landlord is up in the air. For example, who pays if the furnace breaks and repairs are necessary? Who is responsible for property taxes and building insurance?

With a triple net lease, the answer is simple. The tenant pays a base amount each month, and nearly everything else. In other words, the landlord nets the entire amount of the lease each month, without subtracting anything for property taxes, building insurance, or maintenance and repairs. Without sufficient due diligence, it is a great deal for the landlord, not so much for the tenant.

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Other types of leases include:

A modified gross lease, where some expenses are included in the base rent, but the tenant still covers utilities or a portion of the operating costs.
A single net lease, where the tenant pays their base rent plus their share of the property taxes, while the landlord handles insurance, maintenance, and other operating costs.
A double net lease, where the tenant pays their rent plus their share of the property taxes and building insurance. The landlord still generally covers repairs that are needed.
An absolute net lease can be the most disadvantageous contract an ill-informed tenant can sign. It means they are responsible for all expenses, including major structural repairs like a roof replacement.

Due to protections for residential tenants under the Residential Tenancies Act in Ontario, triple net leases are almost exclusively used in commercial agreements. A residential tenant has the right to a safe and liveable home and cannot be held responsible for massive and unexpected repairs.

However, commercial tenants do not have the same level of protection. When signing an agreement, it is essential that you are fully aware of all of the costs you might be responsible for, especially during a long-term contract.

Are you curious about the differences between residential and Commercial Real Estate? Learn everything you ever wanted to know in Commercial Vs Residential Real Estate.

What Does the Landlord Pay in a Triple Net Lease?

Not much, it seems. The advantages of a triple net lease lean in favour of the landlord. With the tenant covering most of the costs of the property—both expected and unexpected—the owner’s financial responsibilities are greatly reduced. However, the landlord is still responsible for some costs, which could include:

Major structural repairs and additions: If something like the roof or foundation is flawed and urgently needs repair, chances are the landlord will need to cover at least some of the costs. (An exception might be if the tenant has signed an absolute net lease, in which case, the landlord is off the hook.) Again, be careful about what you sign, and always seek the advice of a commercial real estate agent.
Building management costs: Typically, the landlord will cover their own administrative costs and property management fees.
Liability insurance: For full protection, a landlord should have a policy completely separate from the tenant’s insurance.

Single-Tenant Triple Net Lease vs. Multi-Tenant Triple Net Lease

There are different types of triple net leases in Canada. Most commercial buildings fall under a multi-tenant lease, where numerous tenants share the costs.

A single-tenant triple net lease means the entire building is occupied by only one entity, as is common for many restaurants and freestanding retail stores. That means they must cover all of the costs of the building as outlined by the lease.

Do you have more questions about commercial real estate or how to invest? You’ll find answers in the related reading below:

Gross Lease vs. Net Lease

The advantages of a triple net lease vs. a gross lease depend on which side of the transaction you are on.

If you are the tenant, a gross lease is almost always favourable, as it means you have a single monthly payment that covers all expenses. With predictable costs, it’s easier to manage your budget for the year.

Generally, the landlord is the one who benefits the most from a triple net lease. So why would a tenant ever sign such an agreement? In some cases, there could be several advantages that make any risks well worthwhile, including:

A significantly lower base rent, possibly leading to reduced overall costs
Potential tax advantages
Long-term stability with terms of up to 10 to 25 years

Signing a triple net lease can be intimidating without access to the right information. The thought of unexpected costs and a long list of “what ifs” is enough to give anyone pause. But the right building that has been well-maintained and constructed can be an ideal site to launch or grow your business.

Insurance costs might also be lower in specific buildings, which can save you even more. A knowledgeable commercial real estate agent can be your ace up your sleeve to identify opportunities and negotiate a lease that aligns with your goals.

A commercial real estate Toronto specialist is an essential partner when buying, selling, or investing in industrial properties. Connect with me at OMarjanovic@kw.com or call 647.620.2882 to learn more.