Modified Gross Lease: Definition, Advantages, Disadvantages, And How Does It Work?

When it comes to obtaining property, businesses have many different options. The costliest option for a business is to acquire a property.

However, due to capital restrictions or other obligations, some businesses may not be able to acquire property directly. Therefore, they may try to get it through other methods such as renting or leasing it.

The type of property that businesses can operate on is known as commercial property. They can use commercial property only for business-related operations.

While businesses can rent a commercial property as well, leasing agreements are more common when it comes to obtaining commercial property.

It is because leases are generally long-term and allow the business better control over the property. A business must enter into a commercial lease to obtain commercial property.

Two of the most common types of commercial leases are gross lease and net lease. Each of these may have further classifications as well.

Gross Lease

A gross lease is a commercial lease that comes with a flat rental fee for the tenant, or the business. It is different from a net lease, where the tenant has to pay a basic rent along with a percentage of other expenses, such as insurance, maintenance and taxes, related to the commercial property to the landlord.

However, instead of paying a proportion of other expenses, the tenant has to pay a higher rent to the landlord in a gross lease. In a gross lease, the rent already consists of provision for these types of expenses.

In simpler words, in a gross lease, the landlord estimates any expenses related to the property that may occur in the future and adjusts the basic rent to compensate for them. It is the reason why the rent is a gross lease is higher as compared to net lease.

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However, the higher rent can be beneficial to both the landlord or the tenant based on whether the actual costs are lower or higher than the estimated costs by the landlord.

Modified Gross Lease

One of the most common types of gross lease is a modified gross lease. While a modified gross lease is technically a gross lease, it can also have some characteristics of a net lease.

A modified gross lease allows the tenant to pay basic rent that contains estimates of some expenses while paying a portion of other expenses to the landlord as well.

Modified gross leases are common for properties that may consist of more than a single tenant, for example, office buildings or shopping malls.

Usually, in a modified gross lease, the tenant takes the responsibility of all expenses that directly relate to the property, while the landlord takes care of other operating expenses.

For example, the tenant may take care of the maintenance of the property used for business activities. On the other hand, the landlord will take care of other operating expenses, such as legal fees related to the property.

The responsibility of both parties is a part of the lease contract and predetermined. Therefore, each party knows the expenses they are responsible for and which they aren’t.

However, there is no set standard for which expenses a tenant or landlord have to bear. The decision depends on each type of property. Therefore, each modified gross lease contract will have different terms according to the property in question.

As mentioned above, a modified gross lease is more common in shared spaces where various tenants use the same premises.

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In these cases, the tenants take care of the expenses that directly relate to them and may apportion others that all of the tenants are responsible for and share.

On the other hand, the landlord will take care of expenses that the tenants don’t directly contribute to or relate to the premises as a general.

 For example, in a shared office building, the tenants will take care of the utility expenses, such as electricity, heating, water, etc. for their particular units. If the utilities are shared, then all the tenants divide the costs and pay them according to usage proportions.

Usually, each unit will have a meter indicating how much each tenant has used. On the other hand, the landlord will take care of the expenses that relate to the building as a whole such as property taxes and insurance. These expenses do not relate to particular tenants.

Advantages and Disadvantages of Modified Gross Lease

A modified gross lease can have some advantages and disadvantages to both parties. For tenants, since the landlord takes care of some costs, a modified gross lease can decrease the costs borne by them.

It allows them to only pay for the expenses directly related to them, thus, also giving them better control over those expenses.

For landlords, a modified gross lease allows them to take care of their property. It can be helpful when tenants don’t care for the maintenance of the property outside of their office units.

On the other hand, if the landlord does not take care of maintenance or does not spend enough, the tenants can suffer due to the aesthetics of the property overall, especially for businesses that may rely on how their customers perceive them.

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Similarly, landlords can also be at a disadvantage with a modified gross lease, if the expenses they are responsible for exceed the rent collected from the tenants.

Conclusion

Businesses acquire commercial property for their operations. They can obtain the property in many different ways, the most common of which is commercial leases. Commercial leases can be two types, gross lease and net lease.

A type of gross lease is a modified gross lease, which, while technically a gross lease, has characteristics of both gross and net lease.

It allows tenants and landlords to divide expenses related to a property. It can have some advantages and disadvantages for both parties.

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