After years of contemplating, Tina has finally decided to open a bakery. She has the recipes, baking prowess and determination to make it a success; the only thing she’s missing is the perfect place to make it a reality.
After a long search, Tina finally finds it – it’s in a busy area, rent seems reasonable, and Larry, the building owner and landlord, is eager to hand her the keys. After some initial discussions, Larry sends Tina a lease and asks her to sign to keep things moving along. Tina does exactly what Larry expects: she skims the document, focuses mainly on the monthly rent amount and signs. The potential problems with the lease, which Tina was too excited to consider at the time, won’t show up until months – or years – later.
This article assumes the lease is a triple net lease, which is one of the most common forms of commercial leases. In a triple net lease, Tina’s obligations do not stop with base rent. In addition to base rent, Tina is responsible for operating expenses, property taxes and insurance. Those costs are often passed through to a tenant as “additional rent,” meaning the full cost of the lease may be significantly higher than the advertised monthly rent amount. For Larry, the benefit of this type of lease is the ability to advertise a reasonable monthly base rent while handing the risk of unexpected expenses to Tina.
This article will highlight three provisions in a triple net lease that tenants should understand before signing. While the focus is on risks to tenants, thoughtful drafting can also benefit landlords by reducing disputes and preserving long-term tenant relationships.
Maintenance, Repair and Replacement Obligations
Operating expenses, including maintenance and repair costs, are one of the areas where tenants are most likely to be caught off guard from unexpected costs. For example, a year after Tina opens the bakery, one of the rooftop HVAC units fails in the middle of summer. The unit is beyond repair, with an estimated replacement cost of $25,000. Tina isn’t too concerned, after all she doesn’t own the building, Larry will take care of the cost, right?
However, she calls Larry and he points out a provision in the lease titled “Maintenance and Repairs,” which states that Tenant is responsible for “maintaining, repairing and replacing all mechanical systems serving the leased premises.” HVAC isn’t expressly called out, but it falls squarely within that definition. Tina is on the hook for the full cost of replacement.
Tenants often assume that items like the roof, structural components, and HVAC remain the landlord’s responsibility. However, unless the lease clearly limits tenant’s obligations, the plain language of the lease will apply, and a tenant may be responsible for structural repairs and/or replacements.
For tenants, the key issue is understanding what systems and components they are responsible for maintaining, repairing and/or replacing. With a more careful review of the lease before signing, Tina could have attempted to shift some or all the burden of repairs and replacements of major building components to Larry.
Landlords, on the other hand, often attempt to include broad maintenance language to shift the risk of unexpected costs to tenants, but leases that push all responsibility onto tenants can create disputes and resentment when major systems fail. Clearly allocating responsibility for high-dollar items can help avoid finger-pointing and keep tenants focused on running their businesses, which allows them to pay their lease obligations on time, rather than fighting over repair bills.
Assignment and Subleasing
With time left on the lease term, Tina’s bakery has outgrown the space, and she finds a larger location that more adequately suits her needs. To avoid carrying two rent payments, Tina lines up a new tenant, Pete, who wants to take over the lease and open a pizza shop. Pete’s financial and business plans are solid; Tina assumes that Larry will have no problem with an assignment of her lease to Pete.
Instead, Larry refuses to consent to the assignment because of a prior personal dispute with Pete that has nothing to do with his ability to perform the obligations under the lease. Larry is within his rights to refuse to consent to the assignment, as the lease states that consenting to or refusing an assignment by Tina is within Larry’s “sole discretion.”
Assignment and subleasing provisions matter because they can provide flexibility to a tenant when circumstances change. When consent can be withheld in a landlord’s sole discretion, a tenant can do everything right and still be stuck paying rent for a space they no longer need.
One common alternative is a reasonableness standard, which requires a landlord’s consent to not be “unreasonably withheld, conditioned, or delayed.” Here, a reasonableness standard would have benefited Tina as Larry would likely not be within his rights under the lease to withhold consent of the assignment due to a prior personal dispute with a prospective assignee.
Improvements
The leased premises required build-out work before Tina was able to open her bakery. She installed ovens, electrical upgrades and custom finishes to make the space functional. Tina’s lease term is set to expire, and she is ready to relocate when another surprise arises. The lease states that any “improvements” become Larry’s property at the end of the lease term, even though they were installed at Tina’s expense. Improvement is not a defined term in the lease, so Larry reasonably claims that all of Tina’s upgrades are now his property as they are attached to the real estate.
These provisions often receive little attention, but they can have major financial consequences. For tenants, the key issues to address are what is considered an improvement, whether improvements become the landlord’s property at the end of the lease term, and responsibility for any improvement removal and associated costs.
Conclusion
In a triple net lease, the biggest risks are rarely obvious upon first read. Operating expenses, maintenance obligations, transfer restrictions and improvement requirements often appear routine but can carry substantial financial risks and consequences over time. Taking the time to understand and negotiate these provisions before signing can prevent expensive surprises later.
The good news is that these risks are not hidden – they are written into the lease. The challenge is knowing where to look and understanding how the language works in practice. If you don’t fully understand what you’re agreeing to, it’s wise to have an attorney review the lease and help you negotiate terms that fairly allocate risk. A commercial lease is not just about rent – it is about risk allocation, and knowing where that risk sits makes all the difference.
Nicholas Mehlum is an attorney with Fryberger, Buchanan, Smith & Frederick, P.A., practicing in the areas of Business and Corporate law, Estate Planning, and Real Estate. This article is not intended to provide legal advice. You should always consult with an attorney about your specific circumstances.
