Triple Net Lease

Shell lease | Triple Net Lease

When buildings are built or remodelled or when industrial production facilities are to be repurposed, it is advisable to evaluate the different interests as well as goals and risks (understood as chances and dangers) at an early stage; both in-house as well as externally. This allows to detect and exploit the optimisation potential.

If a production facility is to be built for the purpose of leasing, and if the developers’ focus lies in minimising investment costs and a stable and therefore foreseeable rental income, the possibility of including elements of the shell lease and the triple net lease in the lease agreement must be examined.

In case of shell lease a lessee rents a property with an unfinished interior, which the lessee will finish according to his or her wishes and at his or her own expense. This will result in lower investment costs for the lessor and therefore lower rent for the lessee. In addition, a shell lease allows the lessee to make tailored improvements without the need to acquire real estate. In this context, the basic finishing of the structure, and therefore the intersection to the lessee improvements, must be precisely specified in the lease agreement. This is essential for the determination of the lessee’s maintenance obligations and the extent of a possible dismantling of the lessee improvements as well as the determination of the compensation for the appreciation of the object as a result of the lessee improvements.

In addition, in the case of a triple net lease, the lessee can agree to be solely responsible for the entire maintenance, repair and renovation costs as well as the real estate taxes, dues and insurance costs, which would otherwise be the responsibility of the lessor. Therefore, the lessor obtains a triple net income. It is disputed whether such an extensive shifting of the obligation to bear maintenance costs is legally valid. Arguably it should be acceptable when the lessee does not suffer a disadvantage from such an agreement, i.e. if the lessee is compensated for assuming the aforementioned responsibilities. As compensation, beside a reduction of the rent, the parties could e.g. agree on a long-term lease, which would allow the lessee the amortisation of the lessee improvements. Nevertheless, the lease agreement must take into account the remaining legal uncertainties.

If, in addition, the leased object contains a heat-intensive production unit, there may be even more optimisation potential if the lessor’s production facilities produce surplus heat, i.e. warm industrial or cooling water. The latter would have to be disposed of by discharging it into a river or the public sewage system and in compliance with a series of legal parameters. In particular the requirements concerning water quality (of the river water as well as the sewage water) listed in annexes 2 and 3.3 of the Waters Protection Ordinance. Even if with the regulation package “Umwelt Frühling 2018” some facilitations concerning water discharge shall be introduced, at least until the possible legislative implementation there is a considerable interest to reduce the pollution (e.g. in the form of high temperatures) of industrial and cooling water, in order to secure its “disposal” and therefore the own production process. Such a reduction in temperature can be achieved by utilising the surplus heat for the heating of a heat-intensive production unit, which – through suitable contractual stipulations with a heat contracting service provider – can significantly reduce the exposure to risk concerning the water protection legislation. Whether the heat contracting service provider should bear all of the responsibilities concerning planning, building and operating of a new energy conversion plant on the owner’s premises (plant contracting) or if the provider shall only be in charge of operating an existing plant (operating contracting) has to be examined on a case-by-case basis and will largely depend on the condition and the life span of the plant in question.