Leasing is when one person uses another person’s assets and gives him or her rent or monthly installments. A lease is a contract between the lessee and the lessor which contains all the rules and regulations all the parties have to follow. The amount of rent, the number of payments and the timing of payments is decided by both the parties and are written on the lease contract. Both the lessee and the lessor have to follow these otherwise they face serious consequences by law.
If a person wants to lease his car, then he the lessor will have to decide how much rent, the lessee will have to pay at the end of each month. The lessee has to sign various documents before he gets the car. There is also a security deposit which the lessee has to give. If anyone of both parties breaks the lease, they might face a lawsuit and a negative credit report. Some lease contracts also have an early termination. Early termination allows the lessee or the lessor to break the contract under specific conditions. One of both parties may also break the lease in its earliest periods if the lessee or the lessor is not fulfilling his or her requirements. For example, a lessor can break the lease contract if the lessee has been irregular during his or her initial payments.
Leasing has become very popular nowadays, especially by businesses and industries. Businesses get their equipment on a lease contract. Amongst these businesses, start-ups are the most common ventures which get their equipment and building on a lease. This is because the equipment is quite expensive and they do not have the budget to buy it, therefore, they make use of the equipment and pay monthly rents. The rents may be high as well, but still, leasing can help start-ups a lot by minimizing the initial set up cost of the equipment.
There are a variety of different real estate leases as well. In this case, the lessee is called the tenant and the landowner or the lessor is called the tenant. The tenant and the landlord decide which costs will be a part of the contract and which parts will not be. These expenses include taxes, insurances, maintenance, utilities, janitorial, structural maintenance, etc. Both parties have to decide who will pay for heating, cooling, gas, electricity, water, telephone, internet, etc. Each and everything is decided beforehand and mentioned in the contract so any types of disputes are avoided in the future. Some leases require all the expenses to be paid by the tenant while some require the landlord to pay for everything. There are other leases too, which find a middle ground between the two extremes. These are discussed below:
1) Absolute Net Lease
Here the landlord pushes all the costs, including costs such as insurance, maintenance, and taxes to the tenant. This contract is built by the landlord with the specifications of the tenant in mind. In this case, because the tenant is paying for all the expenses and is willing to do so the party is a huge settled business who has the means to pay for large taxes, insurance costs, and high maintenance costs. Since the tenant is willing to pay for everything and is an established party the landlord also faces lesser risks as there are fewer chances for the tenant to not pay the rent. However, the rent that the landlord gets is very less as compared to any other form of leasing because of lower risk and because the tenant is paying for everything.
2) Triple Net Lease
A triple net lease includes costs, which are called operating expenses. These operating expenses include costs such as property taxes, insurance, and maintenance. These costs are paid by the tenant in addition to the rent paid at the end of the month. The tenant pays rent above the base rental rate. The amount that exceeds the base amount covers for the three expenses mentioned above. The amount paid above the base rate is also known as TICAM. Which is an acronym of taxes, insurance, and common area maintenance? This lease is also known as the triple N or NNN lease. In this type of contract, the landlord can rent out his land to either a single tenant or to multiple tenants. If the contract includes multiple tenants then some of the costs are taken by the landlord for example maintenance of the structure of the building. The landlord takes control of this to avoid anyone tenant to ruin the building and blaming it on others. Another important thing about this lease contract is that because the users of the building or the tenants are responsible for operating costs and have to pay them themselves, they try to keep it as low as possible. Tenants become responsible for running their business cost-effectively in order to pay less to the landlord.
Modified Gross Lease
In this loan contract the landlord takes responsibility to pay all the taxes, insurance and maintenance costs i.e. the TICAM. The tenant on the other hand only takes responsibility for its janitorial and utility costs. Tenants are required to pay electricity, gas, and water bills. They are also responsible for their janitorial expenses. In this case, the tenant has to pay a higher rent because the landlord holds responsibility for all the major costs. The high rents may be a disadvantage to the tenants, but they also have some benefits. Tenants can work as much as they want and can also cause damage to the building. Not that any of this will be done deliberately, but in case if operating costs rise uncontrollably then tenants will not be held responsible as the landlord agrees to the conditions and took responsibility for the TICAM.
These were three of the most important types of real estate lease contracts. Real estate leases form the major chunk of the total leases and help in building an economy with lots of businesses and firms.