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Part of Quoted rent in commercial leasing: terms to review
Ten commercial lease structures in plain terms and where each puts the risk
Ten commercial lease structures explained in plain terms, from gross and net to breaks, guarantees and subleases, with the clauses each one makes load-bearing.
A lease is a structure before it is a price, and ten structures repeat, each answering three questions differently: who carries running costs, who carries risk of change, and who can end it.
Read them as shapes, not deals. The document in front of you becomes easier to place.
None of these describes a real transaction. Each is a pattern, with the questions that matter to it.
What to take away
- Two leases at the same headline rate can allocate risk completely differently. The structure is where that allocation lives.
- The exit is part of the structure, not an afterthought, and it is what most of these shapes really differ on.
- When you recognize the shape, you know which clauses to read twice.
1. The one where the rent covers most things
The landlord takes a single payment and pays the running costs out of it, often with a base year against which increases are shared. Your exposure is limited but not absent, and the general form is the gross lease.
Read twice: what the base year includes, and what happens if the building's costs are reset by a reassessment or a refurbishment.
2. The one where you carry the building's costs
You pay rent and, separately, your share of taxes, insurance and running costs. In its fullest form this is the triple net lease, and it moves the risk of rising costs onto you.
Read twice: how your share is calculated, whether capital items can be charged, and whether anything is capped.
3. The one with a break in the middle
A term with a right for one party to end it early on notice, usually with conditions attached. The conditions are the clause; the right is decoration if you cannot meet them.
Read twice: who holds the break, the exact notice, and every condition, including whether you must be free of any breach on the day.
4. The one with a guarantee attached
The tenant company is young, so somebody stands behind it. A guaranty is a separate obligation and usually survives events people assume release it.
Read twice: whether it is capped, whether it falls away after a period of trading, and what happens to it on an assignment.
5. The one you can pass on, or cannot
Whether the lease can be transferred decides whether it is an asset or purely a liability. The general concept is assignment, and the usual battleground is what conditions the landlord can impose.
Read twice: whether consent may be withheld and on what basis, whether you remain liable after transfer, and whether a sublet is treated differently.
6. The one where the landlord can move you
A relocation clause lets the landlord put you somewhere else in the building or the center. It exists for good operational reasons and it can strand a fit-out you have just paid for.
Read twice: what notice you get, who pays to move you, and whether the replacement space must be comparable in a way you could enforce.
7. The one that can end for redevelopment
A demolition or redevelopment clause allows the landlord to end the lease to rebuild. Reasonable from their side, and it caps how much you should invest in the space.
Read twice: how much notice, what compensation, and what happens to your improvements.
8. The one where rent follows your sales
Part of the rent varies with turnover. Retailers meet this most, and the mechanism is set out in retail space.
Read twice: the breakpoint, the definition of sales, the reporting obligation and the audit terms.
9. The one where you take part of somebody else's
A sublease sits inside another lease, so your position depends on the head tenant complying with a document you did not negotiate. The general shape is sublease.
Read twice: the head lease itself, what happens to you if it ends, and whether the landlord will give you any direct comfort.
10. The one that is not a lease at all
A permission to use space, with no interest in land behind it. Fast, flexible, and much weaker if things go wrong. The distinction is license against lease, and the practical consequences are in coworking space.
Read twice: notice in both directions, what the operator may change, and what happens if the arrangement above yours ends.
The ten, sorted by what they cost you
Lease structures and exposure
Structure
- Gross
- Cost increases above base year
- Net
- Running costs, capital items
- Break
- Conditions decide if right real
- Guaranteed
- Guarantor, longer than expected
- Assignable
- Ability to pass it on
- Relocation
- Your fit-out
- Redevelopment
- Whole occupation, on notice
- Turnover
- Definition of sales
Exposure
- Gross
- Net
- Break
- Guaranteed
- Assignable
- Relocation
- Redevelopment
- Turnover
The ten, sorted by cost
| Structure | Where the exposure sits |
|---|---|
| Gross | Cost increases above the base year |
| Net | All the running costs, and capital items if the clause allows |
| Break | The conditions, which decide whether the right is real |
| Guaranteed | Whoever gave the guarantee, for longer than they expect |
| Assignable or not | Your ability to get out by passing it on |
| Relocation | Your fit-out |
| Redevelopment | Your whole occupation, on notice |
| Turnover | The definition of sales, not the percentage |
| Sublease | Somebody else's compliance |
| License | Almost everything, in exchange for speed |
How to use the shapes
When a document arrives, place it first. Which of these is it closest to, and which two or three clauses does that shape make load-bearing? Then read those clauses before anything else, and take them to a property lawyer with your questions already written down.
The general reasoning behind the whole negotiation is in commercial leasing, and where the answer is that you should own rather than rent, the comparison is in commercial buying.
Common questions
Which structure is best for a small business?
There is no general answer, and anyone offering one is selling something. What is general is the method: identify the shape, find the two or three clauses it makes important, and read those hardest.
Can a lease be more than one of these?
Usually. A net lease can have a break, a guarantee and a redevelopment clause at once. The shapes are features, not categories.
Is a break clause worth paying for?
If the term is long and your forecast is uncertain, often yes. Price it against the conditions attached, because a break you cannot satisfy on the day is worth nothing.
Where does the fit-out fit into these shapes?
Underneath all of them, and it changes what a relocation or redevelopment clause costs you. The buckets to model are in tenant improvements.
