The Most Common Commercial Lease in Australia

When it comes to leasing commercial property in Australia, a few different options are available. However, the most common type of commercial lease is the net lease. This blog post looks closely at net leases, how they work, and why they are famous for commercial tenants and landlords.

A commercial lease agreement outlines the terms under which a business rents a retail, office, or industrial space from a property owner or landlord. The lease specifies essential details like the length of the term, rent amount, maintenance responsibilities, and other legal and financial conditions.

For companies looking to lease space, one of the first decisions they need to make is whether to opt for a gross lease or a net lease. The main difference between these two standard commercial leases is who pays for the ongoing operating expenses associated with the property.

With a gross lease, the base rent amount covers taxes, insurance, maintenance, and utilities associated with the space. The tenant does not pay any additional recurring fees beyond the base rent.

On the other hand, a net lease is an arrangement where the tenant pays base rent plus their proportional share of the property’s operating expenses. The landlord “nets” out the operating costs separately.

Net Lease Overview

A net lease passes on some or all of the variable costs of operating the property to the tenant in addition to the base rent. The various subtypes include:

Single Net Lease (N lease) – Tenant pays property taxes.
Double Net Lease (NN lease) – Tenant pays taxes and insurance.
Triple Net Lease (NNN lease) – Tenant pays taxes, insurance, and maintenance.
The triple net structure is Australia’s most common commercial net lease type. Under this arrangement, the tenant agrees to cover their share of taxes, building insurance, and maintenance costs on top of the monthly rent. The only expenses the landlord pays are typically mortgage, capital improvements, and management fees.

Advantages for Tenants

There are several reasons why tenants often favor triple net leases for commercial space:

• Lower base rent – Since the landlord doesn’t have to factor operating expenses into the base rent, it is usually lower than a gross rental rate. This helps improve the cash flow of the business.
• Cost transparency – Tenants pay only utilities, maintenance, and repairs that apply to their space, gaining clarity into controllable occupancy costs.
• Customisation control – Within their space, tenants can customise and control expenses to suit their needs rather than relying on the landlord.
• No operating risk for the landlord – Landlords transfer the risk and responsibility for fluctuating operating costs to the tenant.
For these reasons, triple net leases offer financial flexibility and stability attractive to many commercial tenants. The responsibility and control over operating expenses can be beneficial.

Advantages for Landlords

From a landlord’s perspective, there are also benefits to using a triple net lease structure for commercial buildings:

Consistent rental income: The landlord enjoys greater financial predictability since base rent doesn’t fluctuate with changing operating costs.
Lower management involvement: With tenants covering maintenance, repairs, and utilities for their space, landlords have fewer operating responsibilities.
Property value maintained – Tenants assume responsibility for appropriate care and maintenance, helping keep the building’s value.
Lower operating risk: Variable costs are transferred to tenants, minimising operating risk and liability for landlords.
For property investors and landlords, the triple net lease structure offers financial protection and stable rental income even as costs rise over time due to inflation or other factors. This helps make commercial real estate an appealing hands-off investment vehicle.

Common Triple Net Expenses

Under most triple net leases, tenants pay their share of the following recurring property operating expenses:

Property taxes include – council rates, land tax, and other property taxes levied.
Property insurance – Tenants cover their portion of adequate building and liability insurance.
Maintenance – Tenants pay for minor repairs, maintenance, cleaning, and landscaping for common areas.
Utilities – If not separately metered, tenants pay their share of electricity, water, gas, etc.
Property management fees – Tenants may share in the cost of professional property management.
Other – Depending on the lease terms, tenants may pay other expenses like security, snow removal, parking lot repairs, etc.
The specific expenses the tenant is responsible for are outlined in the lease agreement. Landlords typically estimate the annual operating costs and have tenants pay their share monthly with base rent.

Triple Net Leases in Australia

Across office, retail, and industrial segments, triple net leases have become Australia’s most common and accepted form of commercial lease. Tenants see the benefit of controlling their occupancy costs beyond just base rent. Landlords also widely utilize triple nets to stabilise income while transferring operating risk.

Some key advantages that have driven the popularity of triple net leases in Australia include:

Cost transparency and certainty for tenants
Stable and predictable income for landlords
Lower management requirements for landlords
Customisation and operating control for tenants
Lessened risk of rising expenses over long leases
They align tenant and landlord incentives
While gross leases used to be more common nationally, triple nets have become the new normal in commercial leasing over the last decade. This is likely to continue as tenants and landlords appreciate the inherent benefits of the triple net structure.

Negotiating Points in a Triple Net Lease

While many of the costs in a triple net lease are variable, here are some crucial things tenants can negotiate for:

• Cap on expense pass-through – A limit on annual increases on additional rent fees passed through.
• Fixed management fees – Agreed flat rate for monthly property management fees.
• Exclusions – Negotiate any operating expenses to be excluded from gross expenses.
• Audit rights – The ability to audit and dispute gross expenses charged annually.
• Maintenance responsibilities – Delineate landlord versus tenant duties.
• Term length – Shorter terms can limit operating expense risk over time.
• Expense estimates – Ask for detailed breakdowns of all estimated operating expenses.
Tenants should analyse historical operating data provided and negotiate caps or limits where possible. Consulting legal counsel is highly recommended when reviewing and negotiating a triple-net lease.

Things for Tenants to Watch Out For

While triple net leases offer advantages, there are also a few things tenants need to look out for:

• Shifting expenses – Moving out at the lease end can be more challenging as more costs shift to tenants.
• Rent increases – Landlords may increase base rent more frequently to offset fixed costs.
• Poorly maintained buildings – Since tenants cover maintenance, some landlords let upkeep slide.
• Unpredictable costs – Expenses like taxes and insurance can be volatile and rise sharply.
• Lack of landlord accountability – Landlords have less incentive to control costs.
• Fuzzy expense definitions – Ambiguous language on what constitutes gross expenses.
Tenants should clearly understand what operating expenses they agree to cover and try to negotiate reasonable caps and controls where possible in the lease. Consulting a commercial real estate lawyer can help tenants avoid pitfalls.

Alternatives to Triple Net Leases

In some situations, commercial tenants may find that an alternative lease structure makes more sense:

• Gross lease – If you want to lock in total occupancy costs without handling operating expenses.
• Modified gross lease – A hybrid where the landlord covers some expenses (e.g., building insurance and maintenance), but the tenant pays property taxes and utilities.
• Percentage lease – Tenant pays a minimal base rent plus a percentage of monthly or annual sales revenue.
• Short-term lease – More flexibility and manageable expenses over a 6-12 month lease.
For some specialised-use properties like petrol stations, healthcare, or restaurants, a percentage lease or short-term lease may be preferential. Gross leases also offer appealing cost certainty. But the triple net lease remains the most common for most general commercial tenancies.

Triple net commercial leases have become Australia’s most prevalent leasing arrangement for retail, office, and industrial tenants. By making tenants responsible for the three “nets” – property taxes, insurance, and maintenance – triple nets offer financial transparency while stabilising income for landlords.

For these reasons, triple net leases are often ideal for both tenant and landlord. However, it is still important to carefully negotiate terms, caps, and expense definitions within a standard triple net lease form to protect your interests as a tenant. Consulting a lawyer can help strengthen your negotiating position.

If you are leasing commercial space or considering it soon, educate yourself on net and gross leases. This will enable you to enter negotiations armed with the information needed to reach favorable terms. With a strong understanding of triple net lease advantages, obligations, and negotiating points, you can move forward confidently into your following commercial occupancy.