Modified Gross Lease: What t Is and How it Works

Operating a commercial real estate property requires attention to detail and knowledge of the industry. One of the most important aspects of managing commercial real estate is signing a lease agreement. Most commercial lease agreements require both landlords and tenants to pay operational and maintenance expenses on a recurring basis.

This article provides a detailed overview of a modified gross lease and covers the most important aspects of managing commercial properties.

What is a Modified Gross Lease?

A modified gross lease is a commercial lease agreement where both tenant and landlord are responsible for paying ongoing expenses associated with the property. The expenses paid by landlord and tenant tends to vary on a case-by-case basis, and they have to be negotiated by a tenant and landlord before both parties sign a lease.

A modified gross lease is common for commercial properties with more than one tenant. It typically stipulates that a tenant is responsible for paying the base rent as well as some other expenses that are associated with the property such as utilities, insurance and property taxes. Other costs, including maintenance and upkeep, are generally covered by a landlord.

There are several types of commercial real estate leases such as net lease, double net lease, gross lease and modified gross lease, and it’s important to know the difference between them because it allows both parties to understand the lease structure.

Remember that although these lease terms are considered universal, they could also have different interpretations depending on who your landlord is or what country you are in.

Here’s an article about a modified gross lease and how it works.

Why Hire a Commercial Lease Lawyer?

A modified gross lease is a legal document that has to be carefully reviewed before both parties sign it. A modified gross lease is a commercial lease that is different from a standard residential lease and can be confusing to someone who has never signed this type of agreement before.

Keep in mind that any expenses could be negotiated prior to signing a commercial lease, not everything is up for negotiation. The most commonly negotiated expenses include:

• Utilities
• Miscellaneous repairs and expenses
• Common area maintenance (more often referred to as CAM)
• Property insurance

Understanding a modified gross lease could require additional explanation, which is why if you are a tenant, consulting with a commercial lease lawyer is always a good option before signing a commercial lease agreement.

A commercial lease lawyer could help you to properly interpret and coach you on how to negotiate a commercial lease before signing it.

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Modified Gross Lease vs Triple Net Lease

Commercial real estate leases fall in two categories: gross and net. The modified gross lease (also referred to as a modified net lease) is a mix of a gross lease and a net lease.

Modified gross leases are a hybrid of these two leases, as expenses covered by both tenants and landlords. With a modified gross lease, the tenant pays expenses directly related to their leased space, including maintenance and repairs, utilities, and general upkeep costs, while the owner/landlord continues pays for the other operating expenses.

Unlike a modified gross lease where the landlord and tenant share operational expenses, a triple net lease is the type of lease under which a tenant pays all operational expenses associated with the property. Triple net lessees are common for big properties such as shopping malls and restaurants.

A triple net lease is considered simpler than a modified gross lease because the reimbursements structure under a modified gross lease can fluctuate and can be difficult to understand, especially for someone who has never operated in commercial real estate.

How Does a Modified Gross Lease Work?

A modified gross lease falls between a net lease, which passes on property expenses to the tenant and a gross lease, where the landlord pays for operating expenses.

The conditions of a modified gross lease depend on several factors such as:

• the type of building
• the number of tenants
• landlord’s requirements

In some cases tenants could be required to pay for maintenance expenses and cleaning services, while the landlord is responsible for major renovations and property taxes. A modified gross lease usually implies that a tenant covers utility bills and cleaning.

Additionally, a modified gross lease could have extra conditions specifying the cost of maintenance for the first couple of years. For example, a tenant could sign a modified gross lease stipulating that the operational costs will not increase for the first couple of years and that after that, an increase would have to be covered by the tenant.

Here’s an article about how modified gross lease works.

Image via Pexels by Marc Mueller

Pros of a Modified Gross Lease

There are many pros to a modified gross lease which make it an excellent option for those tenants who can’t choose between various commercial real estate extremes of gross and net leases. A modified gross lease is generally a good choice for both tenants and landlords, as it gives landlords control over certain responsibilities and gives tenants control over the costs that they can control.

Below are some of the pros of a modified gross lease:

• More Transparency. A modified gross lease creates more transparency as it allows tenants to audit the expenses associated with the lease and requires landlords to reimburse any charges if a lease is not structured fairly.
• Simple Structure. A modified gross lease is considered a simple structure that allows little window for charging tenants additional expenses.
• Less Responsibility for Maintenance. One of the biggest advantages of a modified gross lease for tenants is the lack of responsibility for the maintenance of the building. This allows corporate tenants to spend more time managing their business operations rather than worry about hiring the right people to do maintenance of the building. This provision allows tenants to focus more on their business.
• More Control Over Budget. Under a modified gross lease, tenants typically have more control over the expenses that directly affect their business such as taxes, rent and salaries. This happens because a modified gross lease requires a landlord to cover maintenance of the building.

Cons of a Modified Gross Lease

Below are some cons of a modified gross lease you should know:

• Limited Control. Lax maintenance on the landlord’s side could be detrimental to the tenant's business. If a landlord neglects to maintain a property in a timely manner, it will likely affect the appearance of the building. For example, if a building begins to deteriorate or look unkempt, it could potentially deter potential customers and put corporate tenants in a bad light.
• Fluctuation. Costs could fluctuate significantly under a modified gross lease. That’s why it’s not uncommon for a modified gross lease to have a provision specifying that the lease stays the same under the first year or two. Changes in the lease could have a significant impact on tenants, especially small businesses and start-ups who have limited budgets. Additionally, landlords could overestimate some of the operating costs of the businesses and pass them on to a tenant.

Get Help with a Modified Gross Lease

A modified gross lease is the most common type of lease in commercial real estate, as it tends to evenly distribute responsibilities between landlords and tenants. As a tenant, you are responsible for paying rent as well as operating costs and janitorial expenses, as well as any increases in property taxes. A landlord typically covers insurance, taxes, and property management.

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