Modified Gross Lease

The modified gross lease is a hybrid type of lease agreement most commonly used in rental real estate where there are several rental units, for example, office buildings. These leases combine the attributes of the two methods of lease calculation - gross and net - in such a way that it benefits both parties. The tenant will be more aware and in direct control of the expenses generated by their unit, while the landlord will be responsible for maintenance and upkeep.

How Modified Gross Lease Works?

When dealing with commercial real estate leases, it is crucial to understand the type of lease agreement that applies to each situation. While their terminology might be similar, theory should each be treated as unique documents and be carefully reviewed by both parties.

With a net lease, the tenant will be covering their unit’s expense, while a gross lease will pass the operating costs to the landlord. Modified gross leases combine the net lease with the gross lease for both the landlord and the tenant’s benefits. The landlord will focus their expenditures on the building’s general maintenance and upkeep, while the tenant takes over those related to their unit.

Through a modified gross lease, the tenant will pay basic rent at the start of the lease, to which they will afterward add a portion of the property’s other costs. How the expenses are split through a modified gross lease is usually negotiated within the lease, and they can vary. Any new tenant should clarify what expenses are defined within the lease as well as responsibilities.

Pros and Cons of Modified Gross Lease

Landlords that use the modified gross lease tend to focus their expenses on maintaining and improving the property’s common spaces without worrying whether their tenants are reliable enough when it comes to repairs. While they transfer the responsibilities of the individual unit costs to the tenants, they have to keep in mind that upkeep and maintenance of common areas are costly. They should establish rents based on the level of upkeep required by the space.

Tenants that use the modified gross lease can focus their attention entirely on managing their budgets for business-related expenses. With the landlord concentrating on maintenance and upkeep, the tenant will cover their unit’s individual expenses, including utilities, janitorial costs, maintenance and repair within their unit, etc. They should be mindful of the landlord’s consistency regarding common areas. Lack of upkeep on common areas’ appearance might affect the client’s perception of the individual business.

Examples of how the Modified Gross Lease is Applied:

If an office building has only one electric meter with a monthly expense of $1,000 and five tenants, the electrical bill could be split evenly like that each tenant would pay $200 each month. However, if the electrical bill is split proportionately to the unit’s square footage, each tenant would pay their pro rata share of the building’s square footage expenses. The last option will be if each unit has an individual electric meter. That would lead each tenant to know their exact usage and cost of power, each paying precisely the amount required to them individually.