Who Is Responsible To Pay Property Taxes On A Commercial Lease?
It is possible to find different kinds of commercial property for sale in London, and there’s no shortage of commercial leases as well.
An agreement between a tenant and a landlord called a business lease spells out the specifics and terms of renting a commercial property. As the name implies, commercial leases are specific to commercial real estate and are drafted differently from residential lease arrangements, .
Who Is Responsible For Property Taxes Under A Commercial Lease?
Depending on the type of business lease and the tenant-landlord agreement, the tenant or landlord may be responsible for paying property taxes. The deal often includes the following:
• Proper property upkeep
• Property insurance
• Utilities
• Additional continuing taxes and fees
Most of the time, tenants will be in charge of everything, leaving the landlord with very few obligations. This may entail a triple net lease (NNN) or a Full Repairing and Insuring (FRI) lease that assigns the tenant costs, fees, and taxes. This laissez-faire attitude gives both parties freedom. Another possibility is a gross lease, which sets all fees, charges, and taxes to the landlord and offers short-term commercial renters a straightforward (though likely costly) opportunity.
Here, we’ll go through commercial property tax in more detail to examine who is responsible for paying property taxes and other costs associated with a commercial lease.
Property Taxes And Commercial Leases
The lease agreement and a breakdown of additional charges, which may include the following, are included in commercial leases:
Maintenance expenses
• Utilities
• Real estate taxes
• Construction Insurance
These expenses could be included in the rent (for example, under a gross lease), in which case the renters would pay the landlord a single flat rent. Alternatively (and more frequently), the tenant will be responsible for paying all of these fees (e.g. net leases or FRI leases).
What Are Taxes On Commercial Real Estate?
Property taxes are one area where previous online discussions are unclear. What do taxes on commercial real estate mean?
First are business rates and the one-time Stamp Duty Land Tax (SDLT). Many people must be aware that the SDLT applies to freehold and commercial leasehold properties. The Present Net Value and premium value of the rent are used in the intricate calculation of SDLT. Government information on SDLT is available here, as well as a calculator. SDLT is always the business tenant’s responsibility. When individuals discuss property taxes on a lease, they probably do not include SDLT because it is a different factor.
The second category is business rates. The primary real estate taxes that affect business leases are those listed above on most non-residential properties, including Stores, offices, pubs, factories, warehouses, lodging establishments, vacation rental properties, and inns.
Business rates are, therefore, a type of commercial property tax. Typically, your local council will issue you a business rates bill for the upcoming tax year in either February or March. The government offers a self-help tool for locating and estimating these bills. It is also possible to receive tax relief or an exemption, which may be automatically deducted.
The tenant is liable for paying these invoices, which are handled by the central government agency known as the Valuation Office Agency (VOA).
Commercial Leases: Types
In addition to property taxes, the tenant or the landlord may be responsible for paying other expenses not included in the rent. Depending on the sort of lease in question, these may apply.
Gross Rent
In gross leases, uncommon in most real estate industries, the tenant is often required to pay rent monthly, while the landlord is responsible for all other costs, such as upkeep, utilities, taxes, etc.
This “all bills and fees included” strategy is typical for shorter, more flexible leases or when the landlord offers their renters some managed service. The landlord is more at risk due to the unpredictability of costs, even if they are typically easy to estimate. Some fees will be included in the lease, nevertheless.
Net Leases
Single-net, double-net, and triple-net leases are the three kinds of net leases which are more prevalent.
• The least frequent type of net lease is the single net lease, which transfers property taxes, such as business rates, to the tenants.
• Double net leases shift the cost of taxes and insurance onto the renter. The landlord will still cover maintenance charges. These are most likely the most typical kind of lease for commercial property.
• In triple net leases, the renters are responsible for all taxes, expenses, and hazards. The tenants will be responsible for maintenance, utilities, taxes, and building insurance. This is, in many respects, the reverse of a gross lease, but it frequently also gives the renters more excellent choices and does so at a lower relative cost than a managed awful lease option.
Take Away
SDLT is always a tenant’s responsibility. However, the landlord or the tenant is responsible for paying business rates. The lease agreement determines how business rates are set up.