A Brief Introduction About the Triple Net Lease Agreement
In most cases, Triple Net Lease is referred to as a commercial or business purpose lease. When the landlord accepts the tenant to pay three net amounts, namely, taxes, insurance, and maintenance in addition to rent and utility expenses, a Triple Net Lease Agreement is signed between both parties. Other two kinds of net leases are Single Net Lease in which the tenant pays taxes in addition to the rent and Double Net Lease in which the tenant pays taxes and insurance in addition to the rent.
For landlords, it is understandable to opt for such leases as on commercial property such a contract becomes a natural source of income. Such income is also risk-free. These leases favor the landlords in more than one way. However, this doesn’t mean that the tenant doesn’t benefit from these leases. The tenant holds more responsibilities, but they also have to pay less rent as they are taking care of other ongoing expenses. Tenants can also negotiate the lease with the landlord.
Another name for Triple Net Lease Agreement is Net Agreement or NNN Agreement.
Who Takes the Triple Net Lease Agreement – People Involved
As we know, all lease agreements are signed between a tenant and a landlord. Some may also include sub-tenants. Similarly, a Triple Net Lease Agreement also involves a tenant, a landlord, and a commercial property. Commercial properties are mostly rented by the landlord to a tenant so that the tenant can do some business there or use it for commercial purposes.
The commercial properties can include shopping malls, industrial buildings, commercial parks, banks, pharmacies, office buildings, restaurant chains, factories, etc. Such a lease term is generally a long term one.
Purpose of the Triple Net Lease Agreement – Why Do You Need It
In Triple net leases of a commercial property, if the entire building or entire property is given to one tenant then there are fewer complexities, however, if there are more than one tenants are involved or if the property is rented to more than one tenant than the calculations can be a little complex. In most cases, there will be many tenants involved. Thus, a tenant has to be more than careful. It is both a benefit and drawback of renting out commercial property.
There are many key purposes of NNN Agreements. Here are some pointwise reasons to choose it –
- It means a risk-free financial investment or money-making business for the property owner or the tenant
- For an owner of the property, it is beneficial as the tenant holds most of the responsibilities
- For a property owner, it is beneficial as the tenant takes the case of all three crucial net expenses
- In case of unexpected expenses, the owner doesn’t have to worry as the tenant has promised to pay those expenses
- In the case of multiple tenants, one tenant doesn’t have to worry about the net expenses all alone
- Rent asked is less as the tenants take care of most of all other expense’s responsibilities
- It is good and beneficial for the investors as it provides a stable income
- A big property gets utilized by all for the benefit of all
- Absolves the landlord of the risk
Contents of the Triple Net Lease Agreement – Inclusions
Firstly, it is important to note that the lease agreement is of many types. For instance, Gross Lease Agreements are the complete opposite of the Net Lease Agreement.
Further, Triple Net Lease Agreements are also of three types, as mentioned above, moving forward, even a NNN can vary from case to case and depending on the number of tenants and term of rent. Depending on all these factors, the contents of the agreement may also vary. Negotiations are another important and necessary process of drafting the agreement. Hence, it is suggested that you use a template but also remain incredibly cautious while drafting it.
Generally speaking, a NNN agreement will have the necessary details of both the landlord and the tenant. Basic details include names, addresses, phone numbers, etc. It will also include details of the commercial property involved. Such information can be the address of it, the size of it, electricity meters, heating, etc. It will also have all the key dates and terms of the rent. It will have details of the deposit if applicable.
It must include details of the notice period to be given by both parties. A tenant gives a notice period to the owner before vacating, and the owner also provides a notice with a period before asking the tenant to vacate or to start any construction work. These details are essential and crucial.
Further, how the payment will be made and on what date of the month, these are also crucial inclusions of the NNN agreement. If the tenant fails to pay on time, there can be a provision of late fee charge or penalty. The owner is well within his rights to impose such penalties and includes them in the agreement.
Since it is a NNN we are talking about, the agreement must include details of how the taxes, insurance, and maintenance will be paid. These details should be specified in a good length.
How to Draft the Triple Net Lease Agreement
NNN is one of the most sophisticated and complex kinds of the lease agreement. Its popularity has been increasing. Nowadays, after a few negotiations, a tenant can also absolve of some of the responsibilities that traditional NNN puts pressure on the tenant. Here we are discussing only the traditional NNN agreement that requires a tenant to pay taxes, insurance, and maintenance beyond the rent and general utility expense.
Before drafting the agreement, both parties have to do a lot of offline work, research, and discussions. Negotiations are one of the most critical aspects of this agreement, and they require few meetings or phone calls. Both parties are suggested to devote a reasonable amount of time before drafting the agreement. The tenant needs to be sure of the expenses that he is going to bear and his obligations.
Similarly, the landlord also has to be sure about his potential income every month from renting. Termination, repair expenses, maintenance expenses, insurance policy, bills, etc. are just a few things that require a proper discussion between both parties. The tenant should also know if a portion of the property is or has been given to any other tenants. In case of more than one tenant, the cost will be prorated based on the area and other things. The tenant must know about these details before signing the agreement.
A tenant has to know that he or she is well within their rights to first negotiate with the owner as much as they can. An absolute Triple Net Lease or traditional CommercialTriple Net Lease can put unnecessary pressure and obligations on the tenant. However, nowadays, with the help of a perfect negotiation strategy, tenants get absolved from some of the cost. Net maintenance, for instance, can vary every month. In times when the property is old, and it requires more maintenance, the tenant can ask the owner to share the cost. The tenant should also try to negotiate the basic rent and should make sure it is as less as possible.
Benefits & Drawbacks of the Triple Net Lease Agreement
NNN has many advantages for the owner of the commercial property. It also has some for the tenant if he makes sure to negotiate with a strategy. Here are some of the Triple Net Lease pros and cons –
- Beneficial for the owner of the property as the tenant has to bear many responsibilities
- Beneficial for the owner as the tenant has to bear the cost of three net amounts
- If the building or property is in good condition, the tenant has to pay less for maintenance. Base rent is already less so less overall cost
- One party is managing the overhead, so there is no confusion and misunderstandings
- The agreement sets forward all the necessary and important details
- The agreement also outlines the dispute resolution method and remedies
- Low cost in case of multiple tenants
- Sometimes the tenant may not have control over the expenses
- The overall cost can be higher than expected for the tenant
- A tenant has to bear the overhead including taxes
- If the property is in bad shape, the maintenance can be unpredictable and can lead to more expenses every month
- Higher risks involved
What Happens in Case of Violation
Before signing the agreement, both parties should discuss possible dispute reasons and dispute resolution methods. The agreement must also specify the governing law and termination(1) policy. Before signing the agreement, both parties should read the agreement multiple times to see if the agreement entirely protects them or not. A tenant should make sure that he knows about all his expenses in advance, and the landlord should know what happens if the tenant tries to harm the property or sell it. Both parties are well within their rights to approach a court in case of a bigger breach or violation(2).
A NNN involves many risks and many benefits. It is only after a clear consideration and discussion that both parties should decide to draft it. Before signing the agreement, both parties should get the assurance they need. There are different Triple Net Lease examples. Depending on the individual case, you should structure the expense and draft the agreement.