What Is a Modified Gross Lease?

A modified gross lease covers some, but not all, building services in exchange for rent. This type of commercial lease can be common in mixed-used buildings where tenants have different needs when it comes to services. The terms vary considerably and are negotiable at the start of the contract, making it important to review them carefully and to ask for any adjustments before agreeing. An attorney can review a modified gross lease and answer any questions a prospective tenant may have.

The rent is fixed at a set amount based on the building, current market conditions, and other contributing factors. These include which services are structured into the lease agreement; the landlord may pay taxes and insurance, for example, or these could be the responsibility of the tenant. Electrical service, metered water, cleaning, and maintenance may also be included in a modified gross lease. Landlords may decline to cover services when use within a building is highly variable. A spa may go through a lot of water, for example, in which case its modified gross lease may exclude water, obliging the business owners to pay for this service.

This contrasts with a full service gross lease, where the monthly rent covers all building services. In exchange for their rent, tenants have use of the space and may be able to make some alterations, but don’t need to pay taxes, insurance, utilities, janitorial, and other service fees. Rents in this situation tend to be higher because the landlord needs to offset the increased expense of running the building. With a modified gross lease, the rent is less expensive, but tenants need to budget for services to stay operational.

Responsibilities can be split with some modified gross leases. In maintenance and repairs, for instance, a landlord may agree to handle major expenses like replacing roofing and flooring. The tenant could be responsible for painting walls and trim, and keeping the space in good working order. Some services may fall into gray areas where the responsibility for payment is unclear, in which case the parties may attempt to negotiate or work out an agreement like splitting the cost.

In addition to stipulating the services provided, a modified gross lease may include restrictions on the space. Landlords can limit the types of businesses that operate in their facilities and may set limits on operating hours, ambient music, décor, and related matters. These limitations may be in place for the benefit of other tenants, to keep a building looking and feeling uniform.