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A modified gross lease is a unique method of property ownership and maintenance, where the landlord and tenant are both responsible for paying operating expenses for a property.
The rent is usually requested in a lump sum payment and can include sums of money that are used to pay expenses like property tax and insurance. It is usually negotiable as to which items are paid for on top of the rent.
Such type of rental and leasing arrangements are not common in the personal retail space but can exist within the marketplace. However, a modified gross lease arrangement can often be found in long-term commercial leases.
A modified gross lease is a popular option for certain kinds of tenants. It allows flexibility and a simpler agreement between the landlord and the tenant. It may also give the tenant an opportunity to negotiate the lease on the unit down, as they are paying for certain expenses. A modified gross lease can be beneficial to someone with strong negotiation skills that can build towards an agreement that gives them a net financial benefit.
Inversely, if the landlord is a strong negotiator, the lease can help them cover a large part of their expenses, making an investment property a lucrative option. However, the marketplace in countries like Canada generally follows a market norm where property expenses are covered by the landlord, making a similar deal difficult to obtain from the perspective of a landlord regarding personal leases.
Some risks for the landlord in modified gross leasing arrangements are below:
1. Unpredictable income stream for owners
2. Profits lost to building maintenance with the turnover of tenants
3. Companies or individuals looking for short-term leases
4. Taxation increases, which makes this type of arrangement less appealing for renters
Some elements of modified gross leases can be found within certain types of residential leases. For example, leasing arrangements where tenants are to pay for the interior cleaning of the building in which they live or the utilities.
Paying for the utilities and cleaning also allows the lessee to pay for higher quality services that fulfill their needs and instead of whichever service provider the landlord chooses.
Modified gross leases also exist within the commercial lease space. Some small businesses may opt for them, as it could require the landlord to pay for the building’s maintenance if it is negotiated into the agreement.
It gives the tenant more control over the types of costs they pay when they negotiate their lease initially and to maintain some semblance of control over their property. If they are paying for their own electricity, there is less likelihood that the tenant would encounter difficulties with a landlord who complains that the power consumption is too high.
Modified gross leases are most often utilized in office park complexes or commercial towers. The leases generally require the office tenants (who often take out a multi-year lease) to pay towards the maintenance of the common areas and the cleaning services of the building.
One of the advantages some commercial tenants may see in such a type of arrangement is the ability to be responsible for the space in which they operate, as well as the ability to audit the yearly and monthly expenses they are paying.
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