An escalation clause, in the context of a triple net lease industry, is a clause in a lease contract that allows the landlord to increase the rent over time. This increase can be based on a variety of factors including, but not limited to, increases in operational costs, inflation rates, property taxes, or insurance premiums.
The escalation clause protects the landlord by allowing them to pass on increased costs to the tenant, keeping the real value of the rent consistent. It’s especially prevalent in long-term leases where there’s a high likelihood that costs will increase over the term of the agreement.
The specifics of each escalation clause can vary, so it’s important for both parties to thoroughly understand how and when rent escalations will occur before finalizing the lease. These clauses should be transparent, clearly stating the formula or method used to calculate the increases, to avoid any future disputes or misunderstandings.
In a triple net lease, the tenant is usually responsible for paying the property’s taxes, insurance, and maintenance costs in addition to rent. These are known as the three nets. Hence, escalation clauses in such leases might often be tied to increases in these nets.