Definition: A lease is a legal contract among a lessor(owner) and a lessee (occupant) to grant a temporary possession or right to use property, i.e. land and building for a certain period and monetary compensation decided at the time of the agreement. Lease comes under the accounting standard-19.
- Parties Involved in lease
- Types of lease
- Difference between lease and rent
Parties involved in Lease
- Lessor: The holder or the owner of the property or land to be leased is termed as lessor. Lessor can be an individual or any legal entity.
- Lessee: The person who is taking the property or land in a lease by paying money for a certain period is termed as lessee. Any person or entity who is in need of property or land can be a lessee.
Types of Lease
- Financial Lease: In a financial lease, all the risks and rewards also get transferred to the lessee, along with consideration.If any of the below-mentioned conditions followed it would be termed as financial lease –
- Ownership or Holding of the asset gets transferred at the end of the lease without or with very nominal consideration (purchase option).
- The lease period is generally of the commercial life of an asset.
- Assets are of specialized nature and cannot be used by a person other than lessee without making a significant modification.
- The present value of the lease rental with residual value is equal to the fair value of assets.
- Operating lease: Operating lease is also known as service lease, and this kind of contract is generally considered when the asset is about to get obsolete.
- Sale and Leaseback: In this lease, the owner of the asset sells it to the leading company which leases it back to the owner. It is done mainly for taxation purposes. This lease is also known as an indirect lease.
Example: A is the owner of the building; he sold the building to B and got that same building in lease from A for the long term.
- Direct Lease: In this lease, the owner and the lessee are two different bodies. It is of 2 types-
- Bipartite Lease: This kind of lease are typically analytical with built-in facilities like up-gradation of machinery. The lessor keeps the asset in use and if necessary changes it with a similar one with an excellent working condition.
- Tripartite Lease: This lease by its name only suggests that it is related to three parties. They are-
For bringing in loans for the properties against the planned purchase of property, tripartite agreement gets established to assist buyers.
- Rate of interest is fixed: There is no need to anguish about the rise in the rate of interest as it will remain the same till the end of the lease contract.
The rate of interest is fixed during the time of signing of the agreement with the mutual consent of the lessor and the lessee.
- Tax benefits: Both lessor and lessee get benefited. The lessor can claim depreciation in books; on the other hand, the lessee can claim lease rentals as an expense.
- Low initial investment: For the new set-ups leasing is an excellent option with low initial cost and expenditure on the purchase of assets.
- Effective use of the company’s capital: Company can use their capital for increasing their other investments rather than investing in asset purchasing.
Leasing is a better option than purchasing fixed assets; the company need not spend bulk amount together.
- Convenience: Leasing is the easiest method of funding fixed assets, although borrowing money from financial institutions has to face various restrictions.
- Time saver: The lessee gets an immediate possession of the asset after the lease contract. No loss of time has to be faced while waiting for the loan sanctioned from the banks or financial institutions.
- No asset obsolescence burden: The company or lessee need not take charge of assets technological advancement or getting obsolete as it is a liability of the lessor.
- No ownership: Lessee doesn’t have the holding rights over the asset at the time of the end of the lease agreement.
- Maintenance of the assets: The lessee doesn’t have any right on the asset but has the burden of maintaining repairing such assets during the time of lease period.
- Lease expenses: The lessee has to make regular lease payments to the lessor. Thus, it will be treated as an expense for the lessee.
- Penalty on lease termination: In case lessee failed to complete lease term or violates any clause mentioned in the contract; the lessee has to face heavy penalties for breach of contract.
- Higher cost: Lease financing may cost higher as lessee has to pay lease rentals along with the other expenses occurred over the assets.
- Restrictions on use of equipment: Lessor may impose some conditions regarding the use of assets at the time of lease and lessee is liable to follow those restrictions while using such assets.
- No benefits of value appreciation: No matter the value of the asset increases during the period of the lease, the lessee won’t get any benefit from the price rise of the asset.
- Double Taxation: Sales tax may be imposed twice once at a time of purchase of assets and twice at a time of leasing of an asset.
Difference between Lease and Rent
|Basis of comparison||Lease||Rent|
|Context||A lease is a contract |
in which lessor gives his asset to the lessee for a fixed period mentioned
in an agreement in lieu of monetary consideration;whereas
|Rent is a precise arrangement
in which the landlord determines
periodic payments and all terms
|Time duration||Lease remains valid for the time mentioned at |
the time of signing
a contract; generally,
it is for the long term,
i.e. more than a year.
|Rent is for a short period.|
|Parties involved||In the lease agreement, the parties involved are termed as the lessor and the lessee.||In rent, these parties are
known as land
lord and tenant.
|Maintenance||In the lease, it is the responsibility |
of the lesser to
take care and maintain
the property or asset.
|In rent, it’s an owner’s or landlord’s responsibility to take care and maintain the rented property.|
|Buying Offers||In lease at the end of the lease contract,the |
lesser gets an option to buy an asset by paying
its current value.
|In rent, no such option is provided
to the tenant.
Lease financing is the best option for those who cannot raise their fund with debt financing. Companies having excess assets can lease their assets to the companies those who require such assets. Thus leasing becomes constructive for both the parties the lessor and the lessee.