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Commercial building leasing is one means for businesses to acquire a physical space for their operations without having to purchase the property outright. However, the type of lease agreement can significantly impact both the tenant's and landlord’s cost, responsibilities, and liabilities.
Moreover, the type of lease can have significant insurance implications for both tenants and landlords, and it is essential to understand the potential risks and requirements before entering into a lease agreement. This article steps you through these important insurance considerations.
There are three primary types of commercial leases: single net, double net, and triple net leases. Each type of lease places a different level of responsibility on the tenant when it comes to expenses and property maintenance.
A single net lease is the most basic type of commercial lease, where the tenant is responsible for paying rent and a portion of property taxes, usually calculated as a percentage of the property's total value. The property owner is responsible for paying all other expenses, including insurance, maintenance, and utilities. While a single net lease is the simplest lease structure, it is also the least common because it may not provide sufficient revenue for the property owner to cover all expenses.
Under a double net lease arrangement, also known as a net-net lease, the tenant is responsible for paying rent, property taxes, and insurance. The property owner must cover all other expenses, such as maintenance and utilities. A double or single net lease may be more attractive to tenants who require flexibility or want to avoid being responsible for all maintenance and upkeep of the property.
The most common type of commercial lease is the triple net lease, also known as NNN lease, where the tenant is responsible for paying rent, property taxes, insurance, and all other operating expenses associated with the property. These expenses may include maintenance, repairs, and other costs such as utilities, landscaping, and property management fees. Triple net leases are popular among commercial property owners as they provide predictable cash flows, shift the burden of property management and maintenance to the tenant, and may offer some tax benefits. Tenants in a triple net lease may find this lease beneficial if they plan to use the property for an extended period, such as a long-term investment or a stable business with consistent revenue streams.
The specific leasing structure you have will determine who is responsible for arranging insurance for such risks as public liability, property damage, and the subsequent loss of operating profit and/or rental income.
While the lease agreement might mean the tenant is responsible for paying insurance, the landlord may still choose to maintain the property insurance for their interests (building replacement, loss of rental income) to ensure adequate control over policy terms and conditions with policy premiums recouped from tenants later. The tenant also remains responsible for maintaining adequate property insurance for their respective interests (tenant’s contents, internal fit-out, loss of operating revenue, etc).
While a financially stable tenant can be beneficial to a landlord, there is also a risk that the tenant cannot fulfill their financial obligations, including property maintenance, and this may lead to avoidable insurance losses such as water ingress caused by blocked gutters. This means it’s important that a robust maintenance program/schedule is built into the lease agreement.
Most commercial leases will require the tenant to maintain insurance for public liability, their property, and glass breakage. While the tenant will be responsible for losses arising from their negligence, the landlord similarly remains liable for their own negligence. Under a triple net lease, however, the landlord can avoid many of the day-to-day responsibilities and liabilities associated with property maintenance. This can transfer significant public liability risk to the tenant for third-party personal injuries resulting from building maintenance issues (e.g., slips and trips caused by uneven surfaces and potholes in carparks, etc.). Having said this, the tenant’s requirement to insure for public liability does not excuse the landlord of all liability and it is critical that the landlord also maintains public liability with respect to their rights and interests even if such liabilities are considered vicarious only.
If you are considering leasing a commercial building, ensure you understand the different lease structures available, including the costs and responsibilities associated with each. Be sure to consult with your solicitor, accountant, and insurance broker before signing any commercial lease agreements to ensure you have a comprehensive understanding of your legal, financial, and insurance obligations.
To find out more, please reach out at any time.
Head of Client Services (NSW)
