The Business Owner’s Guide to Types of Commercial Leases

Commercial leases cover real property used for non-residential purposes—offices, restaurants, retail shops, industrial warehouses, and more. Unlike a residential lease, which governs where someone lives, a commercial lease governs where a business operates.

When negotiating a commercial lease, the type of lease you use plays a critical role in determining what your rent covers and who is responsible for taxes, insurance, repairs, and maintenance. Because these differences can significantly affect your costs and obligations, it is important to understand the three primary categories: net leases, gross leases, and percentage leases.

In Southern California, many landlords and tenants use templates created by AIR CRE (aircre.com), which offers forms for offices, shopping centers, industrial properties, single-unit properties, multi-tenant buildings, and subleases. Others use custom leases unique to the landlord. Regardless of which form you use, the same principle applies: you do not have to accept the terms as written. You can and should negotiate.

A Cautionary Note on Lease Labels

Before diving into the types of leases, it is worth understanding a trap that catches many business owners: the label on a lease does not always reflect its substance. A California appellate court addressed this directly in Tin Tin Corp. v. Pacific Rim Park, LLC (2009) 170 Cal.App.4th 1220, cautioning that the titles “single net,” “double net,” and “triple net” “have no legal significance” and do not determine how costs are actually allocated.

The takeaway is straightforward: do not assume that because a lease is labeled a “triple net” lease, you understand what you are agreeing to. Read the provisions. Understand what each party is actually responsible for. Then negotiate.

Gross Leases

Under an AIR CRE single-tenant gross lease, the tenant pays a fixed base rent and the landlord covers most property-related expenses for the base year. After the base year, the tenant typically pays for increases in property taxes and insurance above that baseline, as well as utilities and any association or condominium fees.

In AIR CRE multi-tenant gross leases, tenants also pay an additional rent amount known as Common Area Operating Expenses, which covers ownership and operational costs such as maintenance of common areas and property management fees.

What this means for you:

• Fixed rent makes budgeting easier and limits exposure to fluctuating property costs.
• Less property management. The landlord handles most operational responsibilities, which can free up your time and attention.
• Common in office and retail complexes. These leases are typical in multi-tenant office buildings and retail centers where the landlord manages shared spaces.

Even with a gross lease, the operating expense provisions warrant careful review. How your share is calculated, what expense categories the landlord can pass through, and whether you have audit rights are all negotiable—and all matter.

Net Leases

A net lease typically provides a lower base rent in exchange for the tenant taking on a greater share of property expenses. The three common variations are:

• Single net lease. The tenant pays base rent plus property taxes.
• Double net lease. The tenant pays base rent, property taxes, and insurance.
• Triple net lease. The tenant pays base rent, property taxes, insurance, and maintenance of the property.

What this means for you:

• Lower base rent, but higher total exposure. The trade-off for reduced base rent is that you absorb more of the property’s operating costs directly.
• Common for long-term single-tenant properties. Retail stores, banks, restaurants, and gas stations frequently use double or triple net leases, often for 15- to 20-year terms.
• Benefits for both sides. Tenants benefit by occupying property long-term without ownership, freeing up capital for their core business. Landlords benefit because tenants absorb more of the operating costs.

Because the substance of a net lease can vary so widely, it is especially important to negotiate the specific provisions governing each category of expense—not just the label attached to the lease.

Percentage Leases

A percentage lease requires the tenant to pay a guaranteed minimum rent plus a percentage of its gross sales, net profit, or another agreed-upon measure. The percentage rent kicks in when the tenant’s sales exceed a negotiated threshold, called the breakpoint.

These leases are most common in retail and restaurant settings, and they are designed to tie the landlord’s return to the tenant’s success. This can be advantageous for new or seasonal businesses that want lower fixed costs when revenues are down—but it requires careful attention to the terms.

What this means for you:

• Negotiate the breakpoint carefully. The breakpoint determines when percentage rent begins. A natural breakpoint is calculated as base rent divided by the percentage rate; an artificial breakpoint is set by negotiation.
• Understand what is being measured. Gross sales, net profit, and other metrics can produce very different results. Know exactly what figure the percentage will be applied to.
• Landlords will want audit rights. Because the landlord’s income depends on your revenue, expect them to require access to your financial records. Negotiate the scope and frequency of any audit rights.
• Watch for continuous operation clauses. Landlords may build in requirements that you continue operating the business even when it is unprofitable—as addressed in College Block v. Atlantic Richfield Co. (1988) 206 Cal.App.3d 1376—to protect their percentage rent stream.

For new or seasonal businesses, a percentage lease can be an attractive structure—but only if the base rent and breakpoint are negotiated to your advantage from the start.

Lessons for Business Owners

• Understand the type of lease you have. The structure of your lease determines the scope of your financial obligations. Start there before negotiating anything else.
• Don’t rely on the label. As the court in Tin Tin Corp. made clear, the name of the lease means nothing. The substance of each provision is what controls.
• Review the operating expense provisions in detail. Whether you are in a gross, net, or percentage lease, how expenses are defined, calculated, allocated, and capped will have a real impact on your bottom line.
• Negotiate before you sign. No lease—whether an AIR CRE template or a custom form—needs to be accepted wholesale. The terms that matter most to your business are almost always negotiable.
• Seek professional guidance. A real estate leasing agent and real estate attorney can help you understand your obligations, identify leverage, and obtain favorable terms tailored to your specific situation.

Remember, while these categories provide a useful framework, the specific facts of your lease, the nature of your business, and the property you are leasing will all shape how these provisions apply to you. If you have questions about a commercial lease you are negotiating or have already signed, don’t hesitate to contact our firm. We can help you navigate these issues and protect your interests.

Please note that the content provided on this website is for general information only; it is not intended to be and should not be construed as legal advice. If you need assistance understanding or negotiating your lease, please reach out to Valerie Li Law, A Professional Corporation, to schedule a consultation.