If you want to learn more about the lessee, you have appeared in the right post. In general, two prime parties are in the lease agreement, and each finance professional must understand how to differentiate between the lessee and lessor.
To learn about the definition of a lessee, you first need to understand what a lease is. Simply put, a lease happens to be a contractual arrangement where a single party (lessor) offers the asset for usage by another party (lessee). The decision is based on the periodic payments for the agreed period. The lessee pays a lessor for the use of property or assets. So, what’s the use of a lessee in real estate?
Leasing the asset is a better choice than purchasing it, as it needs a lower cash outlay. The lessee, i.e., the third party, gets the right to use the asset for a certain period & initiates the periodic payments to a lessor on the basis of the initial agreement. The lease period’s length depends partially on the asset type. For an instant, the land lease to set up the manufacturing plant might be longer when compared to the lease of a vehicle or equipment.
For the lease period’s duration, the lessee takes care of that asset, thereby making routine maintenance. When the lease’s subject is a flat or apartment, a lessee shouldn’t make structural changes without the lessor’s permission. Damages to the real estate should get repaired prior to the contract’s expiry. In case of the lessee’s failure, the lessor can charge the repairing amount according to the lease agreement.
Now, what’s the lease agreement? It’s the contract between the lessee and lessor for using the asset. It outlines the contract’s terms and sets legal obligations concerning the use of assets. Given below are the types of lease agreements:
#1 Capital Lease
The capital lease is the finance lease where the lessee obtains complete control & ownership of an asset. The lessee is also responsible for maintenance and other expenses. Any interest gets recorded separately in the statement. The lessee presumes both boon and bane of the asset ownership. And a capital lease usually is defined as a long-term lease spanning most of the property’s useful life.
Operating Lease
The operating lease happens to be the lease type where a lessor retains the responsibilities and benefits of the ownership. A lessor is in charge of covering the operating expenses. The lessee makes the right use of the equipment or asset for the fixed portion. They do not bear additional maintenance expenses. Unlike the capital lease agreement, a lessee won’t record the asset on the balance sheet.
Sale & Leaseback
The sale and leaseback happen to be the agreement type where a single party buys the property or asset from another. He or she immediately leases it to a selling party. And the seller will be the lessee in such cases. On the flip, the company purchasing the asset is the lessor.
