Triple net may sound like a DIY recipe to enhance your butterfly collecting skills in the video game Animal Crossing: New Horizons, but it is not. In the context of commercial leasing, triple net (often identified as NNN) indicates a lease requiring the tenant to pay a share of the landlord’s costs related to the building. In addition to “base rent” calculated on a square footage basis, in a triple net lease, the tenant is also responsible to pay its proportionate share of taxes, insurance, and common area charges for the building. In other words, in a triple net commercial lease, all, or substantially all, of the carrying costs of the building are passed along from the landlord to the tenant in the form of an additional rent payment.
How are triple net charges calculated? This can vary somewhat, depending on a lease’s terms, and business owners should review any commercial lease provisions that relate to triple net charges or additional rent with care. For example, a commercial lease may provide that, on top of base rent, the tenant is responsible for paying a specific dollar amount to the landlord each month as additional rent. The lease should set forth the charges included in the triple net payment including utilities, insurance, taxes, and common area maintenance. In addition, the lease can specify which costs are included in common area charges, such as cleaning costs, HVAC maintenance, snow removal, or other costs related to maintaining any common areas in the building. Finally, the lease should specify whether the triple net charges are allocated to tenants based on each tenant’s proportionate occupancy of the building as a whole.
Commercial leases can run for many years. How can a landlord set additional rent due for triple net charges in a lease when costs such as utilities, insurance, and taxes are destined to change? The lease should indicate how triple net charges are calculated and communicated to the tenant. For example, a commercial tenant may be required under the lease terms to make a monthly triple net payment based on the prior year’s expenses. At the end of the year, the lease may require the landlord to calculate its actual expenses. Then, these actual costs may be used to set the tenant’s triple net payments for the next year. The lease should also specify the timing and type of notice that the tenant should receive regarding these payments. The lease terms can also specify the circumstances under which a tenant is responsible for paying additional triple net charges, if actual costs exceed the estimated payments, as well as the circumstances under which a landlord may credit a tenant for overpayments. In negotiating a commercial lease, a tenant should note whether the lease provides a process to review or audit the landlord’s triple net charges.
The obligation to make triple net payments, in addition to base rent, is just one example of the many ways that a commercial lease differs from a residential lease. Businesses contemplating entering into a commercial lease should consult with an attorney to review the lease, discuss the tenant’s obligations under the lease, and recommend appropriate revisions to the proposed lease terms. Questions about your commercial lease? Please contact us. We’d be happy to help.
This post is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting with an attorney.