A Glance at Commercial Leases in Texas
Office leases, restaurant leases, shopping center leases, single-use tenant leases, build-to-suit leases, industrial leases, and ground leases, among others, are common types of commercial leases used in Frisco, Texas. Even though they differ in the specific verbiage, each type of lease has some very common attributes.
Possession and Term
Possession is obviously the most important and common attribute, being the centerpiece of any type of lease. The term of the lease for possession of the premises is varies depending upon the type of lease. Usually, commercial leases have longer initial terms than residential leases. However, self-storage leases and some office-suite leases can be exceptions. Most commercial leases have an initial term of at least three (3) years. Although many tenants may balk at the commitment, if their business is successful, then they will be thankful for the longer term that prevents a renegotiation of rent.
As a general rule, the term is somewhat indirectly related to the age of the building. In other words, newer buildings typically have longer initial terms and older buildings typically have shorter initial terms. The reason is because of price, quality, and lender requirements. When a landlord is constructing a new building, the lender desires to have a certain amount of space leased by quality tenants for a fairly long period of time to ensure the lender is making a smart investment.
Similar to the term of a lease, rent is usually also inversely related to the age of the building. The rent for newer space is usually more expensive than older space. Of course, location and other factors are also considerations. For commercial leases, rent is often expressed as a function of square footage. In Frisco, Texas, for example, rent may be quoted as $24 per square foot instead of $5,000 per month. $24.00 per square foot is measured by the year. In other parts of the country, and depending upon the type of commercial lease, the same lease may be measured by $2 per square foot, but measured by the month.
Triple Net (NNN) Lease versus Gross Lease
Often, business owners will see the term “NNN Lease” or “Triple Net Lease” or “gross Lease.” Obviously, a “NNN Lease” is a “Triple Net Lease.” A NNN lease is simply a lease that is net of real estate taxes, insurance, and operating expenses (often referred to as CAM Expenses or common area maintenance depending upon whether the lease has common area.) In other words, the quoted rent does not include the cost of real estate taxes, insurance, or operating expenses.
The quoted rent rate of a gross lease, on the other hand, is inclusive of real estate taxes, insurance, and operating expenses. Of course, a landlord may also quote a rental rate double-net or single-net, while including/excluding one or more of those three stated categories.
Although commercial leases have an entire host of default provision, most defaults relate to the nonpayment of rent, which, if one has a NNN lease, is inclusive of the real estate taxes and insurance. In Texas, a landlord has a host of available remedies if a tenant defaults if they are included in the lease. Typical remedies include (i) terminating possession but maintaining the lease and tenant’s obligation to pay rent; (ii) terminating the lease and accelerating the remaining rent to be immediately paid; and (iii) locking Tenant out, among many other remedies. Further, unlike residential leases, tenants have far fewer rights.
In Texas, commercial leases are quite different from residential leases. Landlords have far greater rights and tenants far fewer. Further, many commercial leases span fifty plus pages and include seven or eight lengthy exhibits. When negotiating a commercial lease, it is wise to hire a real estate attorney experienced in handling them.
Robert Newton is an attorney based in Frisco, Texas, that practices real estate law, business law, corporate law, and estate planning. This post is meant for informational purposes only and does not constitute legal advice.