Lease Agreement: A lease is a contractual agreement between the two parties in which the owner/lessor grants right to the lessee to use his property for a specific period in exchange for regular rental payments.
Types of Lease Agreements
Depending on the type of agreement, there are different kinds of leases contracts. The list of 13 lease agreement types are listed below:
- Financial Lease agreement
- Operating Lease agreement
- Leveraged lease agreement and Non-leveraged Lease agreement
- Conveyance Type Lease agreement
- Sale lease agreement and Leaseback agreement
- Full and Non-Pay-out Lease agreements
- Specialized Service Lease agreements
- Net and Non-Net Lease agreements
- Sales and Lease agreements
- Cross-border Lease agreement
- Tax Oriented Lease agreement
- Import Lease agreement
- International Lease agreement
Financial Lease: Financial Lease is a long-term lease agreement in which lessor receives much more than the cost of property or equipment in the form of lease charges. All the costs including maintenance, taxes, and insurance are paid by the lessee in this leasing. The lessor remains the legal owner of the property or equipment without rendering any service.
The Financial lease is the type of lease where the lessee is responsible for all the risks and returns of the asset till the end of the contract. In simple words, the business owner is responsible for all the risks and returns associated with the assets of the lessor.
Operating Lease: Operating lease is the lease in which lessee uses the asset for a particular period but lessor bears all the risks attached with it. Any of the parties can terminate the lease by giving a notice. Unlike a financial lease, the lessor has to pay specialized services in this lease without being able to realize the full cost of the asset.
Leveraged and Non Leveraged Leases: The leveraged leases are the leases in which lessor arranges some money for purchasing the asset and borrows the rest from any other lender. Here, the lender receives the interest on the asset and assignment of lease and its payments. The leases where there is no third party lender involved are called non-leveraged leases. These are the kind of lease agreements where lessor involves another financer because of being unable to finance the lease alone. Usually, huge amounts are involved in these leases making it impossible for a single person to finance.
Conveyance Type Lease: This is the type of lease where ownership of the asset is transferred from lessor to the lessee during the lease period. The lessee is always the legal owner of the property or asset in the eyes of law.
Conveyance lease is a long-term lease agreement where the lessor has clear intentions to transfer the ownership of the asset to the lessee over a period of time.
Sale and Leaseback: This is a special type of lease where the asset is sold by the owner and the buyer leases it back to the ex-owner of the property or asset. This type of lease arrangement is done when a lessor buys an asset from the company and leases it back to it after instant payment of the costs. Here, the ownership of the asset is transferred to the buyer/lessor while the asset remains with the company which becomes the lessee. This type of lease agreement is done when a company requires finance for running a business but with the same asset.
Full Pay-Out Lease: A lease where the seller/lessor recovers the full value of the asset by leasing it is called a full payout lease.
Non-Pay-Out Lease: When the lessor leases the same asset, again and again, the lease will be called a non-pay-out lease.
Specialized Service Lease: A specialized service lease is a lease agreement in which the lessor provides specialized personalized services to the lessee along with leasing the asset. This type of lease agreement is arranged when the seller/lessor has some specialization.
Net Lease: A lease where lessor pays some or all the taxes, maintenance costs, insurance fees, and other incidental expenses along with paying rent is called a net lease.
Non-net Lease: A lease where the lessor is not responsible to pay any of these expenses is called a non-net lease.
Sales Aid Lease: As the name suggests a sales aid lease is a kind of lease where you offer your customer with finance to save yourself from losing some valuable sales opportunities. This kind of leasing makes you forget the price objection and only concentrate on sales.
Cross-border Lease: The Cross-border lease is the lease arrangement between the residents of two different countries. In simple words, when the lessor is resident of the country other than the residential country of lessee the lease agreement will be called cross-border lease.
Tax Oriented Lease: A tax-oriented lease is in the lease where lessor claims all the tax benefits of ownership and later passes these benefits to the lessee by decreasing the rentals. The asset or equipment leased remains with the lessor till the contract exists.
Import Lease: A lease agreement where both the lessor and lessee belong to the same country and lesser import a certain asset for leasing to the lessee. This type of lease helps the lessor to overcome the cash flow problems that may arise while importing the asset.
International Lease: The international lease is much alike cross-border lease because the parties to the lease transactions belong to different countries.
Commercial V/S Residential Lease
A commercial lease is the lease arrangement between a businessman and a landlord where the landlord leases his asset/land for commercial use by the business tenant. The businessman can earn the profit on this land by manufacturing or selling products and services. The commercial lease is arranged for leasing commercial properties like warehouses, malls, and offices.
A residential lease is the lease arrangement between a landlord and an individual where the individual agrees to use the property leased by the landlord for residential purpose. The lessee assures that he will not use the property for commercial or profit maximization purpose. A residential lease is arranged for a house, condominium, and apartments.
The Difference between a Retail Lease and a Commercial Lease
The commercial lease is arranged between the owner of a commercial property and the individual who intends to use that property for conducting some business. The commercial leases are arranged when the lessee wants to conduct some manufacturing business.
The Retail lease involves an arrangement between a landlord and an individual for the property or land that is suitable for retail business. Here, the lessee cannot use this land for manufacturing business. Instead, he assures the lessor to use the property or land for setting up some retail business.
Therefore, it is always advisory to consult with a leasing lawyer before entering any lease agreement.