AI Review for Triple Net Office Lease Agreements

What is a Triple Net Office Lease Agreement?

A Triple Net (NNN) Office Lease Agreement is a type of commercial lease that falls on the "Net" end of the cost-responsibility spectrum between the Lessor and the Lessee. In a Triple Net lease, the Lessee pays a fixed Base Rent plus a proportionate share of the property's operating expenses, insurance premiums, and real estate taxes. Any costs other than Base Rent are usually lumped together in the defined term "Additional Rent," which is paid in addition to the Base Rent.

A Triple Net lease is distinguishable from other types of Net leases:

• In a Single Net (N) lease, Additional Rent includes the tenant's proportionate share of only the property taxes.
• In a Double Net (NN) lease, Additional Rent includes the tenant's proportionate share of the property taxes and insurance premiums.

Important Characteristics of Triple Net Office Lease Agreements

Applicable Industries: Triple Net leases can be used for a variety of commercial properties, including shopping malls, large office complexes, industrial estates, and stand-alone retail buildings. They can be used in both multi-tenant and single-tenant situations, but are much more frequently used in the latter scenario. For example, many large, multinational companies that want brand uniformity opt for Triple Net leases, including Walgreens. A Triple Net lease for a single tenant can give it more control over how and when the property is maintained, adorned, repaired, and insured. As such, they are widely applicable across industries.

Our NNN is an OLA: Notably, our Triple Net lease is for a multi-tenant office building or complex, so while it could be used for other commercial purposes such as retail, manufacturing, or even industrial uses, it would need to be appropriately modified for those uses. Additionally, in a single-tenant scenario, the parties would want to delete any reference to other tenants of the property (which is significantly easier than adding such a reference). Other than that, the degree to which the parties would modify our NNN would largely depend on the use of the space and the needs of the parties.

Investor-Favored Commercial Lease: Triple Net lease properties are seen as a solid investment option during economic downturns, as they provide investors with a good mix of steady income from long-term tenants, fewer variable costs associated with maintaining the investment, and fewer hands-on responsibilities when it comes to taking care of the property itself.

Pros and Cons of Triple Net Office Lease Agreements

The Triple Net lease is a standard, widely-used type of contract that is at the Net end of the cost responsibility spectrum.

Pros of this type of lease are:

1. It is easily modifiable to the needs of the parties in regard to non-office commercial uses of the space
2. It has a lower fixed Base Rent than a modified gross lease
3. It provides a long-term consistent source of income to the Lessor with little risk
4. They can offer the Lessee more control over how the property is maintained, repaired, and insured

Cons of this type of lease are the same as a Modified Gross Office Lease Agreement, but to a greater degree:

1. Its complicated cost structure means it should be negotiated by sophisticated parties
2. Additional Rent is variable in nature, which makes it harder for tenants to forecast expenses
3. If poorly negotiated, there is the potential for overcharging by the Lessor

Unique Provisions of Triple Net Office Lease Agreements

The following provisions in our NNN OLA are either not included in the other office lease agreements or have been expanded to more thoroughly address issues unique to the Triple Net contract type:

1. Triple Net Lease: This provision explains the type of office lease the parties intend to execute and summarizes the costs each party will be responsible for paying.
2. Real Property Taxes: This provision explains what real property taxes in regard to the building or property as a whole the Lessee is responsible for, how they will be apportioned, and when they must be paid. These are in addition to the personal property taxes for which the Lessee would normally be responsible for in a gross or modified gross lease.
3. Lessor's Insurance: This clause sets forth the insurance policies and coverage amounts to be maintained by the Lessor and may limit the degree to which the Lessor can insure the property and at what cost, as these costs will be partially passed on to the Lessee. While there is a short version of this in the Modified Gross Office Lease Agreement, it is significantly expanded in the NNN as the tenant, which will pay a proportionate share of the Lessor's insurance costs, has a vested interest in including a thorough insurance provision.
4. Lessee's Insurance: Our NNN includes a more extensive insurance provision for the Lessee in order to provide a natural balance as to the specificity with which insurance is addressed overall within the agreement.

Checklist for a Good Triple Net Office Lease Agreement

To ensure that your Triple Net Office Lease Agreement is effective, comprehensive, and legally sound, use this checklist:

•  Clearly define the Base Rent and how it is calculated
•  Specify what costs are included in Additional Rent
•  Include an audit clause to allow the tenant to verify Additional Rent calculations
•  Clearly explain the Triple Net lease structure and each party's responsibilities
•  Detail how operating expenses, insurance premiums, and real estate taxes are apportioned
•  Include comprehensive insurance requirements for both the Lessor and the Lessee
•  Consider including a cap on controllable Operating Expenses
•  Tailor the agreement to the specific property use (office, retail, industrial, etc.)
•  Adjust the agreement for single-tenant or multi-tenant scenarios
•  Ensure the agreement is reviewed by legal counsel and real estate professionals
•  Have the agreement signed by authorized representatives of both parties
•  Keep a fully executed copy of the agreement for your records

AI Contract Review for Triple Net Office Lease Agreements

To give you a sense for the benefits of leveraging ai contract software trained by lawyers, we’ve selected some sample language our software presents to customers during a review. Keep in mind that these are static in this overview, but dynamic in our software - meaning our AI identifies the key issues and proactively surfaces alerts based on importance level and position (company, 3rd party, or neutral) and provides suggested revisions that mimic the style of the contract and align with party names and defined terms.

These samples represent a small sample of the pre-built, pre-trained Legal AI Contract Review solution for Triple Net Office Lease Agreements. If you’d like to see more, we invite you to book a demo.

TRIPLE NET LEASE

For: Both

Alert: May be missing an article stating that the lease is considered a triple net lease.

Guidance: It is crucial to distinguish between gross leases and net leases, as they determine the financial responsibilities of the lessor and lessee. A net lease implies that the lessee covers utilities, taxes, maintenance, and insurance costs in connection with the ownership, maintenance, and operation of the leased premises.

This distinction is vital as it clarifies the obligations of both parties under the lease agreement, helping to prevent disputes and misunderstandings due to unclear cost allocation. For instance, a small business owner leasing office space would benefit from knowing their financial responsibilities, allowing for more accurate budgeting.

While there may not be specific statutes or laws governing gross and net leases, general contract law principles and state-specific landlord-tenant laws should be considered when drafting and negotiating lease agreements.

Sample Language:

TRIPLE NET LEASE

The Parties acknowledge and agree that, except as otherwise expressly provided herein,  LESSOR shall not be responsible for the costs of utilities, real estate taxes, operating expenses, or insurance costs in connection with the ownership, maintenance, and operation of the Leased Premises. In addition to Base Rent, LESSEE shall pay to the parties respectively entitled thereto all Additional Rent obligations and liabilities that arise with regard to the Leased Premises during its Term.

ADDITIONAL RENT

For: Lessor

Alert: May be missing an article regarding additional rent.

Guidance: Consider adding an article stipulating that in addition to the base rent, lessee shall pay to lessor all amounts and charges payable under the lease.

Sample Language:

ADDITIONAL RENT

In addition to the Base Rent, LESSEE shall pay to LESSOR all amounts and charges payable by LESSEE under this Lease, whether or not contemplated, including, without limitation: LESSEE’s Proportionate Share of the total Operating Expenses, Real Property Taxes, and Insurance Costs, a management fee in an amount equal to [●●] percent ([●●]%) of the then-applicable monthly Base Rent (“Management Fee”), and any other amounts that LESSEE is obligated to pay LESSOR per this Lease (collectively, “Additional Rent”). 

As used herein, “LESSEE’s Proportionate Share” means [●●] percent ([●●]%) of the total Operating Expenses, Real Property Taxes, and Insurance Costs for the Building and Land, based on the ratio of the square footage of the Leased Premises to the rentable square footage of the Building on the date of this Lease. Any adjustment to the Leased Premises’ or the Building’s rentable square footage measurements will be reflected in an adjustment to LESSEE’s Base Rent or Proportionate Share.

Additional Rent will begin to accrue on the Commencement Date and is payable in advance, on a monthly basis (along with Base Rent), in an amount set forth in an Estimate (as defined in this Lease) provided by LESSOR, but subject to adjustment after the end of the year on the basis of the actual amount of Additional Rent owing for such year.

PROPERTY TAXES

For: Both

Alert: May be missing an article making the lessee liable for their proportionate share of all real property taxes during the lease term.

Guidance: The suggestion to allocate the financial responsibility for real property taxes to the lessee in an Office Lease Agreement is a practical approach to clarify financial obligations. This arrangement typically requires the lessee to pay a proportionate share of the property taxes, calculated based on the proportion of the property they occupy or use.

This provision is particularly important in preventing ambiguity or disputes over who is responsible for paying property taxes, which could lead to legal disputes or financial hardship. For instance, if a business leases a floor in an office building, the lease agreement might specify that the business is responsible for paying a proportionate share of the property taxes, calculated based on the square footage of the leased space compared to the total square footage of the building.

It is crucial to consider local and state property tax laws, which can vary widely, and the Internal Revenue Code, which may have provisions related to the deductibility of property taxes for businesses. Both parties should consult with a tax professional to understand the potential tax implications of this provision.

Additionally, the concept of ""tax escalation clauses"" should be considered. These clauses allow the landlord to pass on increases in property taxes to the tenant. However, their enforceability and application can vary by jurisdiction. For example, in California and New York, tax escalation clauses are generally enforceable if they are clear and explicit, but the landlord must provide the tenant with a copy of the tax bill or other pertinent information. In some jurisdictions, there may be statutory protections for small business tenants that limit the ability of landlords to pass on tax increases. Therefore, while the principle of passing on property tax liability to the lessee is generally accepted, its application can be subject to specific regulations and exceptions depending on the jurisdiction.

Sample Language:

PROPERTY TAXES

1. Real Property Taxes. LESSEE shall be responsible for its Proportionate Share of all general and special real property taxes, assessments (including, without limitation, change in ownership taxes or assessments), liens, bond obligations, license fees or taxes levied or assessed by any lawful authority against the Leased Premises applicable to Term of this Lease (“Real Property Taxes”). All Real Property Taxes for the tax year in which the Commencement Date occurs and for the tax year in which this Lease terminates shall be apportioned and adjusted so that LESSEE shall not be responsible for any Real Property Taxes outside of the Term of this Lease. Real Property Taxes shall be paid monthly in advance as part of LESSEE’s Monthly Additional Rent, as estimated by LESSOR based on the most recent tax bills commencing with the month (or partial month on a prorated basis if such is the case) that the Commencement Date occurs.

2. Personal Property Taxes. LESSEE shall be liable for all taxes levied or assessed against personal property or fixtures owned or placed by LESSEE in the Leased Premises (collectively, “Personal Property Taxes”), except to the extent such taxes are levied or assessed on such property after it becomes the property of LESSOR. If any such Personal Property Taxes are levied or assessed against LESSOR or if the assessed value of LESSOR’s property is increased by inclusion of personal property or fixtures placed by LESSEE in the Leased Premises, and LESSOR elects to pay such taxes, LESSEE shall pay to LESSOR upon demand that part of such taxes for which LESSEE is primarily liable hereunder.

Best Practices for Using Triple Net Office Lease Agreements

To make the most of your Triple Net Office Lease Agreements and ensure their effectiveness, follow these best practices:

1. Understand the Structure: Make sure you fully understand the Triple Net lease structure and what costs you will be responsible for as a Lessee. Don't hesitate to ask questions and seek professional advice to ensure clarity.
2. Conduct Thorough Due Diligence: Before signing, thoroughly review the property's operating expenses, insurance policies, and tax history. This will help you better understand your potential Additional Rent obligations.
3. Negotiate Key Terms: While the Lessee typically bears more costs in a Triple Net lease, there may still be room for negotiation on certain terms, such as caps on Operating Expense increases or specific exclusions from Additional Rent.
4. Plan for Variable Costs: Because Additional Rent can be variable and substantial in a Triple Net lease, it's important to carefully budget for these costs and factor them into your overall occupancy cost analysis.
5. Utilize the Audit Clause: If your lease includes an audit clause, consider conducting regular audits of the Lessor's Additional Rent calculations to ensure accuracy and identify any potential overcharges.
6. Maintain the Property: In a Triple Net lease, the Lessee often has more control over property maintenance and repairs. Ensure that you are proactively maintaining the property to avoid more costly repairs down the line.
7. Review Insurance Coverage: Carefully review your insurance policies to ensure that you are meeting the requirements set forth in the lease and that you have adequate coverage for your business needs.

Conclusion

Triple Net Office Lease Agreements are a common leasing structure that can offer benefits to both Lessors and Lessees, but they also come with significant responsibilities for the Lessee.

By understanding the unique provisions of these agreements, such as the apportionment of operating expenses, insurance premiums, and real estate taxes, businesses can make informed decisions about whether a Triple Net lease is right for their needs.

To ensure the effectiveness of your Triple Net Office Lease Agreement, it's important to carefully review and negotiate the terms, conduct thorough due diligence, plan for variable costs, and maintain the property and your insurance coverage. By working with experienced legal and real estate professionals and following best practices, you can create a strong, mutually beneficial leasing arrangement that meets your business needs and protects your interests.