Commercial Lease Basics: Gross, Net, Triple-Net, CAM, and Why Attorneys Matter (2026)

How commercial lease law differs from residential

Residential landlord-tenant law in the United States has, over the last 50 years, moved sharply in the tenant-protective direction. The Uniform Residential Landlord and Tenant Act (URLTA) and parallel state codes have established implied warranties of habitability, statutory deposit caps, eviction-procedure protections, mandatory disclosures, and rent-cap frameworks in many jurisdictions. Commercial law has not followed that path. Commercial leases remain governed largely by contract law and common-law principles, with state-specific commercial-tenant statutes that are typically far narrower than their residential counterparts.

The practical implications run through almost every aspect of the lease. There is generally no implied warranty of habitability for commercial premises; the tenant takes the property as-is with the landlord's specific repair obligations defined entirely by the lease. There is no statutory deposit cap; commercial landlords typically require 2 to 6 months of base rent (or more for less established tenants), often supplemented by personal guarantees or letters of credit. There is no statutory rent control; even in jurisdictions with residential rent caps (NYC, San Francisco, Los Angeles), commercial rents are unregulated. There is generally no just-cause eviction protection; commercial leases end at the natural term unless the lease provides for renewal options.

Commercial leases also place far more obligations on the tenant. The tenant typically pays for tenant improvements (often with a landlord-funded allowance that is a critical negotiated item), maintains the interior of the premises, pays for or contributes to property taxes and insurance, and (in retail) may pay percentage rent on top of base. The tenant assumes more risks (use restrictions, exclusives, co-tenancy provisions, casualty and condemnation outcomes) and bears them under contract terms the parties negotiated rather than under statutory protections.

The corresponding upside for tenants is flexibility. A commercial lease can be precisely tailored to the tenant's business: term length, options for renewal, expansion or contraction rights, exclusivity provisions, signage rights, hours of operation, parking allocation, and dozens of other points are negotiable. A residential lease is largely a take-it-or-leave-it form; a commercial lease is a multi-year contract that warrants the same care as any significant business agreement.

The four primary rent structures

Commercial leases use four primary rent structures, identified by short acronyms that obscure their economic substance. Understanding the structures is essential because they shift very different amounts of property risk between landlord and tenant.

The gross lease (sometimes called full-service gross or FSG) has the tenant paying a single all-inclusive rent. The landlord pays property taxes, insurance, and all operating expenses out of the rent. The tenant's exposure is fixed for the lease term (subject to escalations the lease provides for). The landlord absorbs increases in property tax assessments, insurance premiums, utility costs, and maintenance. Gross leases are common in older office buildings and in smaller multi-tenant office spaces.

The modified gross lease sits between gross and net. The tenant pays base rent plus the tenant's pro-rata share of increases in operating expenses above a base-year amount. The tenant absorbs increases above the base year; the landlord absorbs the base-year amount. The base year is typically the first year of the lease. Modified gross structures are common in office leasing in the U.S. midwest and southeast.

Net leases shift property-expense exposure to the tenant. Single net (N) shifts property taxes. Double net (NN) shifts taxes plus insurance. Triple net (NNN) shifts taxes, insurance, and common-area maintenance. The base rent is correspondingly lower than for a gross lease, but the all-in cost depends on the actual property expenses. NNN leases are the dominant structure in retail (especially anchored shopping centres), in industrial single-tenant buildings, and in net-lease investment property held by REITs and 1031-exchange investors.

The absolute net (or bond net) lease is a fourth structure that goes beyond NNN. The tenant takes on essentially every property-related expense, including roof and structural maintenance and capital expenditures that would normally be the landlord's responsibility. Absolute net is rare and is found primarily in long-term sale-leaseback transactions with creditworthy tenants (a corporate headquarters, a flagship retail store, a distribution centre). The structure approximates a property-secured corporate bond, with the landlord receiving rent essentially regardless of property condition.

CAM charges, base year, and pass-through caps

Common Area Maintenance (CAM) charges are the operating costs of shared spaces in a multi-tenant property: parking lot maintenance, landscaping, snow removal, security, common-area lighting, lobby cleaning and maintenance, exterior building maintenance, property-management fees, and shared utilities for common areas. CAM charges are typically allocated to each tenant in proportion to the tenant's share of the total rentable square footage in the property.

CAM allocation methods vary. Pro-rata-share allocation is the most common: the tenant pays (tenant's rentable square footage / total property rentable square footage) times total CAM. Anchored-tenant adjustments are common in shopping centres: anchor tenants (department stores, major grocers) often pay reduced CAM shares under separate negotiated rates, with the difference allocated to small-shop tenants. Some leases use occupancy-grossed-up CAM, treating the property as fully occupied for purposes of calculating each tenant's share (which protects the landlord from vacancy but increases the tenant's exposure).

The CAM-charge provisions are among the most heavily negotiated items in any commercial lease. Tenants seek caps on annual CAM increases (typically 3 to 5 percent year-over-year), exclusions for capital expenditures (which should be the landlord's responsibility), audit rights (allowing the tenant to verify the landlord's CAM calculations), and detailed exclusion lists (excluding landlord's general corporate overhead, lease-up costs, and items not benefiting the tenant). Landlords resist most of these provisions because they shift property-expense risk back to the landlord.

Property tax pass-through in net leases follows similar mechanics. The tenant pays its pro-rata share of property taxes (sometimes with a base-year adjustment). Tenants seek the right to contest property tax assessments (and to share in any reductions achieved), the right to require landlord cooperation in tax appeals, and protection against retroactive assessment increases (which can be devastating when a property is reassessed after a sale). Insurance pass-throughs are similar: tenants pay their pro-rata share of property and liability insurance, with negotiation around the types of insurance carried, the coverage amounts, and the carrier selection.

Percentage rent: the retail mechanic

Percentage rent is additional rent calculated as a percentage of the tenant's gross sales from the leased premises, paid on top of base rent. The structure is the dominant rent model in regional and super-regional malls and is common in airport retail, certain restaurant categories, and high-traffic specialty retail. The rate varies by tenant category: apparel typically 5 to 8 percent, fast food 6 to 10 percent, jewellery 6 to 10 percent, specialty retail 4 to 7 percent.

Percentage rent is typically paid only on sales above a defined breakpoint. The natural breakpoint is calculated as base rent divided by the percentage rate. For example, a tenant with 100,000 dollars annual base rent and a 6 percent percentage rate has a natural breakpoint of 1,666,667 dollars. Percentage rent is paid only on sales above that threshold; below it, the tenant pays only base rent. Some leases use an artificial breakpoint (set lower than the natural breakpoint, increasing the landlord's percentage rent) or no breakpoint at all (percentage rent starts at dollar one).

The "gross sales" definition is the most negotiated element of any percentage-rent clause. Tenants seek to exclude sales tax, returns and refunds, internet sales not fulfilled from the store, sales of gift cards (counted only when redeemed), employee discounts, and certain promotional sales. Landlords seek the broadest possible inclusion. The drafting of "gross sales" can change percentage rent by 10 to 25 percent for a typical tenant, with material economic consequences over a 10-year lease.

Percentage rent also creates reporting and audit obligations. The tenant typically reports gross sales monthly or quarterly, with annual reconciliation. The landlord has audit rights, typically once per lease year, with the tenant paying for any audit that reveals understatement above a defined threshold (typically 2 to 5 percent). Sales-reporting integrity is a recurring source of landlord-tenant disputes; modern retail POS systems make data extraction easier but multi-channel sales (online, in-store, click-and-collect) complicate the calculation.

Why DIY commercial leases are dangerous

For all but the smallest, simplest commercial leases (very short term, very low rent, single-tenant building, parties known to each other), self-drafting or using a free template is generally a false economy. Commercial leases are multi-year, multi-six-figure contracts. The cost of a competent commercial real estate attorney to negotiate a lease (typically 3,000 to 15,000 dollars depending on complexity, with retail leases often the most expensive) is small relative to the total economic exposure.

The most consequential commercial-lease provisions are those that affect business operations and exit flexibility: use restrictions (what can the tenant sell or do?), exclusives (does the tenant have exclusivity in the centre for its category?), co-tenancy (can the tenant reduce rent or terminate if anchor tenants leave?), assignment and subletting (can the tenant transfer the lease without landlord consent?), expansion options (does the tenant have the right of first refusal on adjacent space?), renewal options (at what rent and on what notice?), termination rights (any tenant or landlord termination triggers?), CAM caps and audit rights, percentage-rent breakpoint and gross-sales definition, and personal guarantee scope and burn-off (does the personal guarantee reduce or terminate after a defined period of good performance?).

Each of these provisions can be heavily customised, and the customisation can shift millions of dollars in value over a multi-year lease. A free template captures none of this customisation. The tenant signing a free-template commercial lease typically agrees to the landlord's standard form with all provisions tilted in the landlord's favour, with no negotiated protections, and with personal guarantee scope and CAM allocation that may surprise the tenant years later.

The narrow exception is a very short-term commercial lease (less than 12 months) for low-value premises (under 2,000 dollars monthly rent) where the parties know each other personally and the use is uncomplicated. Even there, a basic template should be reviewed by an attorney for a few hours rather than signed unreviewed. For anything more substantial, a commercial real estate attorney is essential.

Where to find a commercial real estate attorney

State bar association lawyer referral services are the standard starting point. Every U.S. state bar maintains a referral programme that connects clients with attorneys in specific practice areas. State bars typically charge a nominal referral fee (often 25 dollars) for an initial consultation of up to 30 minutes, with hourly rates negotiated directly between client and attorney thereafter. The state bar lookup pages are typically at the state-bar-name.org domain.

Commercial real estate brokers are another source. Most experienced commercial brokers work with two or three commercial real estate attorneys regularly and can recommend based on the specific deal type. Brokers do not draft leases (in most states they cannot, as they are not licensed for legal practice) but can recommend attorneys with relevant experience in retail, office, industrial, or other property types.

For startups and small businesses, the Small Business Administration's SCORE programme provides free mentorship that can include initial guidance on lease evaluation. SCORE mentors are typically retired business executives and attorneys, and while they cannot provide legal representation, they can help identify the most important issues to focus on with a paid attorney.

Some online legal service providers offer commercial lease review at lower price points than traditional firms. The quality varies, and online services rarely provide the negotiation experience that distinguishes a competent commercial real estate attorney. For routine review of a landlord's form lease (with the tenant agreeing to most provisions), online services can be a cost-effective starting point; for negotiated leases with significant customisation, traditional representation is generally better value.

Related pages

For the residential / commercial comparison (the most-trafficked page on this site), see the existing residential vs commercial guide. For residential lease basics, see the homepage. For state-specific residential rules, see the state hub. For LLC operating agreements (relevant if the commercial tenant is forming an LLC for the business), see the sister site operatingagreementtemplate.com.

Frequently Asked Questions

Sources

• SBA Office of Advocacy commercial lease guidance: sba.gov
• SCORE small-business mentorship: score.org
• BOMA International (commercial property standards and best practices): boma.org
• International Council of Shopping Centers (retail leasing): icsc.com
• State bar association lawyer referral programmes: search "[state name] state bar lawyer referral" for the relevant state
• FASB Topic 842 (Leases) for lease accounting treatment: fasb.org