Are lease agreements in retail parks still triple-net?

The lease agreements concluded for retail parks increasingly feature solutions that differ from the classic Triple Net Lease agreements, particularly as regards the settlement of operating costs and the division of responsibilities between the parties. The latest trends

in this area are reshaping the relationship between the parties, balancing the interests of investors and tenants while responding to increasing market expectations. In this article, we share our observations from the CMS team’s practice and point out the implications of these changes for the retail sector participants.

In the commercial real estate sector, it is standard for property owners to use the Triple Net Lease (NNN) agreements. In this arrangement, in addition to the base rent, the tenant bears the full operating costs associated with maintaining the property, including

the real estate tax, insurance, fees for maintaining common areas, and utilities. At the same time, tenants in this model can use the property freely (basically on the same terms as the owner), without having to commit significant capital to purchase the property, and

with greater flexibility regarding the length of time they can use the property.

The triple-net model involves the transfer of the cost risk from the owner onto the tenant, making it an attractive solution for investors and real estate funds.

Retail parks, as a type of commercial property, also typically operate under this model. However, observing the changing realities and market practices – especially in terms of operating cost settlement – it is worth asking whether the solutions currently used in retail parks actually correspond to the classic Triple Net Lease model.

Service charge in retail parks – structure and settlement models

Based on our observations, there has been a growing number of deviations from the traditional model of settling operating costs in retail parks. In the standard Triple Net Lease, tenants cover these costs in full, usually through monthly or quarterly advance

payments, which are verified against the actual expenses incurred by the owner at the end of the settlement period (most often one year). The landlord also has the right to revise the amount of advance payments for the next period, adapting them to the projected costs.

In practice, however, we are increasingly encountering alternative settlement models, such as:

• Cost cap – the upper limit of costs that the tenant may incur in a given settlement period. Even if the landlord’s actual costs turn out to be higher, the tenant will only pay up to the agreed limit.

• Indexation - a fee set as a fixed lump sum that can only increase by the index adopted in the agreement (e.g. the inflation index according to Statistics Poland (GUS) or the HICP).

• Lump sum - a fixed, monthly fee based on projections that is not subject to settlement according to the actual costs after the end of a given settlement period. Sometimes, agreements exclude the possibility of increasing this fee during the term of the lease.

However, this is currently the least common option.

Our analyses show that the above models are becoming increasingly common in retail parks, ceasing to be an exception reserved for the largest tenants, as is the case in large shopping centres.

Responsibilities of the parties – maintenance of the lease area

In the context of the above considerations, it is worth noting the technical and cost-related specifics of retail parks as compared to large shopping centres. Retail parks are characterised by a simple technical structure and limited common areas - most often access roads and customer car parks. Due to the independent access to the premises (directly from the car park), tenants are usually responsible themselves for the maintenance of the leased spaces. The landlord’s responsibilities are limited to maintaining the building’s structure and the retail park’s common areas, which, as mentioned, are limited.

Bottom line – does triple-net leasing in retail parks still work?

Despite the growing number of deviations from the classic settlement model, lease agreements in retail parks still essentially follow the Triple Net Lease concept. However, it is crucial to precisely define the parties’ responsibilities regarding the maintenance of the leased space and common areas, considering the specific characteristics of the facility in question. By properly regulating these issues in the lease, it is possible to maintain a settlement model that protects the landlord against losses while making the property more attractive to investors.