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Should You Sign A Triple Net Lease?

Should You Sign A Triple Net Lease?

Whether you are starting a new business or expanding an existing business, one of the biggest expenses besides employees is rent or mortgage for that business. Typically the easiest way to keep costs down is to rent or lease office space.

There are many types of lease agreements, but the most common one that insurance brokers run into with their clients is the Triple Net Lease, also known as Net-Net-Net or NNN. This type of lease often requires the tenant to pay not only the rent and normal property expenses, but also the taxes, insurance and other maintenance, utilities and expenses not found on a typical lease.

Should you sign a Triple Net Lease? Read on to find out.

Standard Lease vs Triple Net Lease

In a standard lease the landlord will outline what is expected of the tenant in terms of monthly rent, maintenance and expectations with regard to conduct, insurance, etc. While it may not be specified in the lease agreement, the monthly rent usually includes not only the landlord’s mortgage payment, but also any monthly maintenance and the insurance that the landlord pays for the building. Your monthly rent check covers his expenses.

In a Triple Net Lease those expenses aren’t included in the lump sum but are clearly outlined in the lease or rental agreement. The expenses are probably the same as with a standard lease, but you see the numbers for yourself and are paying them as part of the lease payment or in addition to it.

Who Purchases & Pays For The Insurance

The Triple Net Lease usually requires that the tenant pay the insurance for the building owner/landlord. This can be done in one of two ways:

  1. The landlord submits the insurance invoice to the tenant for payment.
  2. The landlord requires the tenant to purchase insurance on the building naming the landlord as a loss payee on the policy in the event of loss.

Paying the landlord’s invoice may mean paying more than you would pay insuring the building on your own. Since the landlord is purchasing the insurance and passing the costs on to you, they are not motivated to get the best possible premium for that coverage.

Purchasing coverage and naming the landlord as loss payee can also be tricky. If you purchase your coverage including contents coverage for your own property, the landlord will be required to sign off on any loss payment for those items, as well.

Other Triple Net Lease Complications

When reviewing a Triple Net Lease, it is important to review all requirements for maintenance, but especially insurance.  Your landlord may require you to purchase certain insurance policies for yourself that shouldn’t necessarily be required.

For instance, your landlord may make it part of the insurance requirements that you, the tenant, provide proof of contents coverage for your unit. While this shows fiscal responsibility on the part of the tenant, the landlord has no insurable interest in your personal contents, so this requirement most likely has no place in the lease.

If you occupy the entire building you could also be headed for trouble in the event of a fire caused by someone in your company. The fire damage legal limit on your liability policy (also known as damage to rented premises) is often not enough to cover an entire building. If your unit is damaged your general liability policy would not cover the portion of the building that you occupy, and the fire damage legal limit would create a coverage shortfall. This would result in higher out of pocket expenses for your company on a building you do not own.

There are ways to remedy this situation: by increasing the fire damage legal limit to cover the entire building (expensive) or getting a waiver of subrogation from the landlord for your rental unit and giving him one in return. It is a complicated process and one that should be discussed before the lease is signed, not after.

While a Triple Net Lease can be complicated, even a standard lease can contain items that may be detrimental to your business.  To make sure you have the proper coverage for your business you should do the following before you sign any lease:

  1. Consult with a real estate attorney to discuss the terms of the lease related to tenant expectations and maintenance, as well as any insurance requirements.
  2. Consult with your insurance broker to discuss the insurance requirements as they relate to your current or future insurance coverage, including premium costs and coverage availability.

Know before you sign on the dotted line. It could save you a lot of money in the long run.

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