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Commercial Lease vs Retail Lease

Before entering a lease, tenants and landlords must be aware of the different obligations and responsibilities that come with signing the contract. Although commercial and retail leases have some similarities, there are some substantial differences between these two types of contracts. In this article, we’ll discuss some of the most common questions tenants and landlords have about contracts in which one party conveys a property.

What Is a Commercial Lease?

A commercial lease is a legally binding contract between a landlord and a business for the rental of a property. This is a long-term contract that lasts between three to five years. Many businesses rent properties to conduct a business because this is a far more affordable option than acquiring a property.

What Is a Retail Lease?

A retail lease is a lease of business premises where the property is only used for selling goods. They are used for shop premises that are located in shopping centers and they are governed by the Retail Lease Act 1994 (NSW). 

The Difference Between Commercial Lease and Retail Lease

Commercial and retail leases have many similarities, however, they are governed by different laws. In a retail lease, the landlord must follow state-specific retail legislations, while commercial leases are regulated by the state-specific property and conveyancing Acts. 

Here are some key differences between commercial and retail leases:

Commercial Lease

  • Both parties can negotiate the duration of the lease.
  • Tenants are requested to cover legal costs.
  • In case of a dispute, both parties can instigate proceedings without the need for mediation.
  • All security bonds are held by the landlord’s real estate.

Retail Lease

  • The tenant must rent the property for a minimum of five years.
  • The tenant and the landlord are responsible for different types of costs.
  • In case of a dispute, both parties must mediate before they start to resolve the dispute at the NSW Civil and Administrative Tribunal.
  • All security bonds are held by the office of NSW Fair Trading.

What Is the Best Type of Commercial Lease?

The most common type of contract between a landlord and a tenant is the Triple Net Lease (NNN Lease). This contract legally binds the tenant to pay the base rent and operating expenses such as maintenance, property taxes, insurance, and utilities.

What Are the Three Types of Leases?

Commercial real estate has three types of leases: gross lease, net lease, and modified gross lease.

Gross Lease

A gross lease or a gross rent lease is a type of lease that includes all charges. This means that a tenant pays a flat rent fee that includes taxes, insurance, utilities, and maintenance. Gross leases come with higher prices but they do protect the tenant from paying any additional costs that may occur. Gross leases are usually not used for residential properties because the landlord can’t predict if the tenant will damage the property and create costs for the landlord.

Net Lease

Net leases are contractual agreements that are commonly used in commercial real estate. In a net lease, the tenant covers all costs associated with the rented property.  This means that tenants must pay for the rent, taxes, insurance fees, and any additional costs that may occur. 

The major difference between a gross lease and a net lease is that, in a net lease, the tenant pays a flat rent fee which covers all charges, whereas in a gross lease the tenant has responsibilities similar to owning the property. This type of contract frees landlords from costs associated with property damages.

Modified Gross Lease

A modified gross lease is similar to both gross and net lease agreements. In a gross lease, the tenant and the landlord are both responsible for the operating costs. They are allowed to make negotiations and split the costs. For example, the tenant may be responsible for the maintenance and upkeep costs, while the taxes and insurance costs may be paid by the landlord.

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