What are the advantages of a net contract agreement?

These types of net leases are usually favoured by property owners and new real estate investors. They give more security of investment return if the percentage of outgoings increases faster than base rent. The tenant will have to absorb this increase in this real estate investment.

What is a gross lease?

In summary, gross rent is the opposite of net rent. Under a gross lease, the tenant pays a whole gross rent amount that includes all common area maintenance in most cases. Other additional expenses include property taxes, insurance costs, maintenance costs, and council rates for the entire term of the lease. The tenant has no obligation to pay rent other than the basic gross rental. The landlord usually calculates this and has the outgoings included in the total amount based upon the anticipated expenses. Sometimes, a tenant may pay a percentage of the increase in outgoings from the lease’s first (base) year. On other occasions, depending on economic factors, the landlord may choose to absorb some of the outgoings under a modified gross lease. This is usually more popular with tenants because it can avoid cost surprises.

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What are the advantages of a gross contract agreement?

The main advantage is that it puts an upper limit on the maximum rent payable to the landlord. On the other hand, the landlord may choose this method to attract tenants in testing economic conditions.

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The landlord will have to absorb an accelerated increase in outgoings in this situation.

Gross Rent Calculator

The following example is from another office John was looking for in the same area. In this example, the landlord was looking at offering a gross lease agreement.

The office size was of the same size (100m2) and similar position and quality. The quoted rent was $41,000 per annum.

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This gross rental was going to be more expensive for the first year than the $40,000 John was quoted in the net lease example.

Should the tenant take the gross or net rent agreement?

It looks like it is better to go for the cheaper net lease agreement on the surface. Whether it is better depends on whether the tenant thinks that outgoings will increase faster than the annual rent increases.

If the annual rent increase was 3%, and the outgoings grew to 6% per year, then the gross rental agreement would look better in the long term. On the other hand, it could be a better choice to go for a gross lease if you thought that outgoings would increase 1-2% per year, with everything else being equal, including rent increases.

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Category: WHICH