Definition of Lease and the Types of Lease
Definition of ‘Lease’
A legal document outlining the terms under which one party agrees to rent property from another party. A lease guarantees the lessee (the renter) use of an asset and guarantees the lessor (the property owner) regular payments from the lessee for a specified number of months or years. Both the lessee and the lessor must uphold the terms of the contract for the lease to remain valid.
Leases are the contracts that lay out the details of rental agreements in the real estate market. For example, if you want to rent an apartment, the lease will describe how much the monthly rent is, when it is due, what will happen if you don't pay, how much of a security deposit is required, the duration of the lease, whether you are allowed to have pets, how many occupants may live in the unit and any other essential information. The landlord will require you to sign the lease before you can occupy the property as a tenant.
Types of Leasing
There are two main types of lease: Finance Leases and Operating Leases.
Finance Leases
Under a finance lease, the finance company owns the asset throughout and the agreement covers a set period – considered to be the full economic life of the asset. Often, there is an option to continue leasing at a reduced, or ‘peppercorn’ rate, at the end of the contracted period.
As you are not the owner of the asset, you cannot sell the asset during the rental period.
The finance company can claim the writing-down allowances and pass this benefit to you in reduced rentals.
Operating Leases An operating lease runs for less than the full economic life of the asset, and the lessee is not liable for the financing of its full value.
The lessor carries the risk associated with the residual value of the asset at the end of the lease. This type of lease is often used when the asset is likely to have a resale value, for example, aircraft and vehicles. The customer gets the use of the asset, sometimes along with other services.
A legal document outlining the terms under which one party agrees to rent property from another party. A lease guarantees the lessee (the renter) use of an asset and guarantees the lessor (the property owner) regular payments from the lessee for a specified number of months or years. Both the lessee and the lessor must uphold the terms of the contract for the lease to remain valid.
Leases are the contracts that lay out the details of rental agreements in the real estate market. For example, if you want to rent an apartment, the lease will describe how much the monthly rent is, when it is due, what will happen if you don't pay, how much of a security deposit is required, the duration of the lease, whether you are allowed to have pets, how many occupants may live in the unit and any other essential information. The landlord will require you to sign the lease before you can occupy the property as a tenant.
Types of Leasing
There are two main types of lease: Finance Leases and Operating Leases.
Finance Leases
Under a finance lease, the finance company owns the asset throughout and the agreement covers a set period – considered to be the full economic life of the asset. Often, there is an option to continue leasing at a reduced, or ‘peppercorn’ rate, at the end of the contracted period.
As you are not the owner of the asset, you cannot sell the asset during the rental period.
The finance company can claim the writing-down allowances and pass this benefit to you in reduced rentals.
Operating Leases An operating lease runs for less than the full economic life of the asset, and the lessee is not liable for the financing of its full value.
The lessor carries the risk associated with the residual value of the asset at the end of the lease. This type of lease is often used when the asset is likely to have a resale value, for example, aircraft and vehicles. The customer gets the use of the asset, sometimes along with other services.