Leasing 101, Part 6: Base Rent
There are three main types of rent in leases: base rent, additional rent, and percentage rent. Additional rent and percentage rent are topics for another day, but here is a quick summary of each of these three types:
Base Rent: The annual rent paid for the right to the leasehold interest, which essentially is the right to the exclusive use and possession of the leased premises.
Additional Rent: This includes additional costs that a landlord and tenant agree are tenant’s obligation. Usually, these additional rent costs are a proportionate share of common area expenses, landlord’s insurance, and real estate taxes.
Percentage Rent: Very simply, this is rent equal to a certain percentage of a retail store’s gross sales.
Base rent seems to be fairly basic: tenant’s obligation is to pay the amounts listed in the lease. However, as part of a lease review, it is important to spend a bit of time double-checking relevant base rent provisions.
Some things to consider include:
1. Is It Gross, Modified Gross, or Triple Net?
Gross: Under a gross lease, the tenant pays base rent and does not pay any additional rent. Landlord will pay the taxes, insurance and common area costs. Utilities may or may not be paid by tenant, and it is worth checking how these are handled. It generally is assumed that gross rental will be a bit higher than triple net or modified gross rent due to the fact that landlord is paying the additional rent charges.
Triple Net: Tenant pays the base rent plus its proportionate share of common area expenses, landlord’s insurance, and real estate taxes. The general idea is that the building’s tenants are paying for all operating costs of the building.
Modified Gross: This type can vary in design, but generally, tenant pays the base rent and also pays any increases in additional rent above the additional rent amount during the first year of the lease. The lease’s first year usually is called the ‘base year,’ and tenant is obligated for increases over this base year.
2. How is the Rent Calculated?
Rent almost always is stated on a ‘dollar per square foot’ basis. If this $/sf amount is not specifically stated in the lease (i.e. only the rent amount is stated), it is helpful to insert the $/sf amount in case the leased premises are remeasured.
Additionally, all of the rent calculations should be checked to make sure that the per-square-foot rate multiplied by the square footage actually does equal the stated annual and monthly rent amounts.
3. How is the Rent Paid?
The annual rent should be paid in equal monthly installments. Otherwise, landlord could demand unequal amounts at various points of the year and disrupt tenant’s cash flow. This is a minor, but important, point to check.
4. Right to Remeasure?
It generally is helpful to include a right to remeasure the leased premises. If tenant believes that there is a discrepancy between the actual square footage and the amount represented in the lease, tenant could have the premises remeasured. If the premises really are smaller than as represented in the lease, the rent and any other cost based on a $/sf calculation should be reduced.
A helpful backstop to this is to have a 5% cap on any remeasurement, which would avoid a significant adverse effect if the premises are actually larger than as represented in the lease.
Generally, the rent provision is not subject to much negotiation in a lease review. However, it is worth spending a few minutes just to make sure that the provision is clear and accurate and does not place tenant in a disadvantaged position.