The lessor is the property or asset owner who rents it out, receiving payments for its use. On the other hand, the lessee is the party paying to use the property or asset under agreed terms. There are different types of leasing namely Finance Lease; Operating Lease; Leveraged Lease; Conveyance Lease; Sale & Leaseback; Complete & Non Pay Out Lease; Specialized Service Lease; Net & Non Net Lease; Sales aid lease; cross border lease; tax oriented lease, import lease; and international lease etc.
Finance lease:
A finance lease is similar to a long-term rental agreement where the lessee takes on most responsibilities and risks associated with owning the asset similar to a position as if he has purchased the asset. There are two stages – the primary stage is a non-cancellable period when the lessor recoups his entire investment through lease rental. The duration of the original contract or primary lease has to be sufficiently long to enable the lessor to amortize his or her capital outlay out of the rentals and to receive an adequate return on his or her outlay. The primary lease will usually be somewhat less than the expected economic lifetime of the asset but long enough to enable the whole of the lessor’s outlays to be recovered without raising the rentals to unreasonably high levels from the lessee’s point of view. The lessee will extend the lease period by entering into a secondary phase. The lease during the second phase is significantly lower than the introductory period and usually, rent will be lower than the original rate. The good may be sold to the lessee or third party if the lessee is not interested in extending the lease or buying it.
Operating lease:
In this type of lease, the lessee utilises the property for a defined period but does not get ownership rights of the property. Operating leases are similar to short-term rentals, commonly used for assets like equipment or vehicles. They offer shorter terms and more flexibility, making them ideal for lessees who don’t want long-term commitments or need assets temporarily. At the end of the lease, the lessee can return the asset without further obligations, providing agility and cost-effectiveness.
Leveraged lease:
In this type of lease, the lessor makes part payment and borrows another part of the cost from a third party for buying an asset to be leased. Therefore three parties are involved in a leveraged lease, the lessor, lessee, and third-party lender. The assets and rents serve as collateral to the lender. The loan is paid from lease rents by the lessee or the lessor. The excess rent overpayment of loan installment is paid to the lessor. Hence, the lessor functions as an ownership participant, paying only a portion of the price of the properties and the lender provides the remainder. This type of lease is often employed for large, expensive assets where the lessor requires financing assistance.
Conveyance lease:
The conveyance lease agreement is a type of hire-purchase agreement generally known as a lease to own. A conveyance lease allows the lessee to eventually take ownership of the leased asset after fulfilling certain conditions, such as making a predetermined number of lease payments.
Tax oriented lease:
In a tax-oriented lease, also called a true lease, the lessee is given full possession of the asset for a monthly fee. Once the lease term is over, the asset must be returned to the lessor. It is called a tax-oriented lease because, through this lease agreement, the lessor can claim all the specified tax deductions and benefits associated with leasing. Lessee may also claim benefits like deductions for lease payments, accelerated depreciation schedules, or other tax incentives aimed at reducing overall tax liabilities. Tax-oriented leases optimize tax efficiency for lessors and lessees, enhancing financial performance and mitigating tax burdens through strategic lease structuring.
Sale and leaseback:
In a sale and leaseback transaction, the asset owner sells the asset to a lessor and immediately leases it back. Thus, the seller becomes the lessee and the buyer becomes the lessor cum owner. This strategy allows the owner to unlock capital tied up in the asset while retaining operational use. Sale and leaseback arrangements are commonly used by businesses to improve cash flow, optimize balance sheets, and redeploy capital into core business activities without sacrificing asset utility.
Complete & non-pay-out lease
A complete pay-out lease entails lease payments covering the entire cost of the leased asset, enabling the lessee to ultimately assume ownership. On the other hand, a non-pay-out lease involves ongoing lease payments without the option for ownership transfer. These lease structures cater to varying financial objectives, with complete pay-out leases offering eventual ownership benefits and non-pay-out leases providing long-term asset utilization without ownership obligations.
Specialized service lease
In a specialized service lease, the lessor provides additional services like maintenance, repairs, or customizations tailored to the lessee’s requirements. With the value-added services, specialized service leases enhance lessee convenience and operational efficiency, ensuring optimal asset performance throughout the lease term.
Net & non-net lease
In a net lease, the lessee assumes responsibility for base rent and additional costs such as property taxes, insurance, and maintenance expenses. Net leases are classified as single net leases, double net leases, and triple net leases. The lessee pays the rent after reducing the expense paid for maintenance, taxes, insurance, repair costs, etc. The lessor is liable for maintenance, insurance, and other expenses in a non-net lease.
Sales aid lease
Sales-aid leases involve the lessor providing products or services to support the lessee’s sales efforts. If the lessor joins an advertising alliance with a producer, this type of lease is known as a sales-aid lease. Sales aid may include leasing display units, demo equipment, or other assets for marketing purposes. Sales-aid leases empower lessees to enhance sales initiatives without substantial capital investment, facilitating business growth and market expansion through strategic leasing partnerships.
Cross border lease
In a cross-border lease, the leasing takes place across national borders. This may be associated with shipping, aviation services, and other services. Cross-border leasing is a complex process due to variations in legal systems, tax regulations, and currency exchange rates, which require meticulous consideration of international business dynamics. These leases facilitate global business operations, enabling access to diverse markets and resources through cross-border leasing arrangements.
Import lease:
Import leases involve leasing assets from foreign suppliers or specialist asset finance companies particularly when domestic sources are unavailable or specialized equipment or expertise is exclusively available from overseas suppliers. The specialist asset finance company purchases the assets from overseas sellers on behalf of domestic businesses and leases domestic businesses in return for regular rental payments. It helps local businesses overcome the cash flow problems that can arise from the need to pay for items in one lump sum when importing assets. Import leasing maintains a healthy business cash flow throughout the process of purchasing new assets from overseas, keeping the company’s working capital free to reinvest. Further, it helps the expertise provided by asset finance companies to get the best equipment from the right overseas supplier. At the end of its repayment period, the lessee will own the asset outright. Import leasing is an ideal funding solution for companies that import products regularly as the asset finance company assumes the risks associated with cross-border transactions. Import leases enable businesses to access global markets and leverage international resources through leasing arrangements, facilitating cross-border trade and operational efficiency.
International lease:
International leases cover leasing transactions between parties in different countries, necessitating consideration of cross-border legal and regulatory requirements. Whenever one or more parties of any lease agreement belong & have domicile in a different country, this kind of lease is termed an international lease.
After learning what it means to remove certain legal hurdles to international material financial leasing, The 1988 UNIDROIT Convention on International Financial Leasing was established by the International Institute for the Integration of Private Law (UNIDROIT) in Ottawa. It governs the many sorts of financial leasing contracts. Although this custom is relatively uncommon in practice, it has historical significance.
Lease contracts come in various forms. There are three primary types of commercial lease agreements in India:
- Gross Lease:
A gross lease is also known as a full-service rental agreement. Under this commercial lease agreement, the lessor takes care of all expenses and costs, such as taxes, licensing, and upkeep costs, from the rent paid by the tenant. The asset owner is entirely liable for the property leased and the lessee focuses solely on their business operations. The contract should mention the costs of renting the business space and the terms within which the charges may rise. Therefore, gross lease rates may be higher than those of other lease types.
- Net Lease: A net lease is a commercial lease wherein the tenant pays for the leased area and all or a portion of the typical expenses such as maintenance or operation, taxes, insurance, utility payments, etc. of the leased asset. While this lease allows the lessor to earn a passive income, it can pose financial challenges for the lessee; particularly if unexpected costs arise the lessee must have adequate capital for unplanned expenses.
- Modified Gross Lease: This type of lease resembles a gross lease with some variations, allowing for specific terms for different expenses. However, in this type of lease, the lessor demands the rent in a lump sum. There is scope for negotiation between the lessor and lessee. The parties to the contract may discuss the charges specified in the introductory rental price. A modified gross lease is more tenant-friendly as it gives them more control over costs that directly impact their companies, such as rent, taxes, salaries, etc.
In India, commercial leases are signed for a defined period. There is a time limit after the agreement terminates.
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