Reading a net lease

Begin with the named parties

The name on a building is not necessarily the tenant named in the lease. A site might be operated by a subsidiary, a franchisee or another entity. Research should distinguish the business customers recognize from the party with contractual obligations.

The same care applies to a guaranty. A familiar brand does not establish that its parent company guarantees rent. Whether a guaranty exists, who provides it and its limitations require review of the relevant documents by qualified advisers.

Locate the responsibility for each cost

Descriptions such as single net, double net or triple net are shorthand. They should not replace a review of provisions dealing with taxes, insurance, maintenance, structural repairs and capital items. Different agreements may allocate similar costs differently.

A research summary should identify questions for document review rather than asserting that the owner has no obligations. Counsel can interpret the agreement; property and engineering professionals can evaluate the condition of the building and the likely scope of physical work.

Operating costs

Which expenses are paid directly, reimbursed or subject to a cap or exclusion?

Building responsibilities

How does the agreement address the roof, structure, systems and common areas?

Extraordinary events

What provisions address casualty, condemnation, interruption or termination?

Keep the current term separate from options

The remaining initial term and possible renewal periods are not the same thing. An option may depend on notice, timing or other contractual conditions. A list of option periods does not establish that a tenant will exercise them.

Rent schedules also need dates and context. A stated increase may occur during the current term, on renewal or under a formula. Summaries should preserve that distinction. Calculating the economic implications is separate financial work, not an origination conclusion.

Use the complete document set

An original lease may have been amended, assigned or supplemented. A summary based on a single document can miss an important change. Relevant documents should be collected through a suitable process once the parties and their advisers establish the scope of the discussion.

This guide identifies research questions, not the legal meaning of a particular lease. Owners and investors should rely on their own counsel and other qualified professionals for interpretation, diligence and transaction decisions.