Leasing is an alternative to purchasing a property. It allows one to pay for the use of an asset owned by another party over a specified period. A lease refers to a contract that defines the terms under which one party, lessee or the tenant, agrees to rent an asset of the owner, known as the lessor. In this article, we will explain the different types of leases.
What is a lease?
A lease refers to a legally binding contract signed between two parties, where one party (lessor) allows another party (lessee) to use their real estate or other assets for payment for a specified period.
Types of lease
There are different types of leases, such as finance leases, operating leases, leases, conveyance, etc.
Financial lease
A financial lease refers to a lease where the lessee rents an asset from the lessor for a major portion of the asset’s useful life. In this type of lease, the lessor transfers almost all the risks and benefits of an asset holding to the lessee in return for rent. Thus, the lessee is in a similar position as if they have 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 main phase may last for an unlimited time. The lease during the second phase is significantly lower than the introductory period.
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. Such leases enable businesses to use an asset while saving on the high expenses involved in purchasing the asset. After providing notice, either party may cancel the lease. In an operating lease, all costs are borne by the lessor.
Leveraged lease
In this type of lease, the lessor loans a part of the buying cost from lenders. The assets and rents serve as collateral. The loan is paid from lease rents by the lessee or the lessor. The excess (which refers to the gap between the contract and the payback part) is delivered 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.
Conveyance lease
In a conveyance lease, the lease is set for a lengthy period with the definite goal of transmitting property ownership to the lessee.
Sale and leaseback
In this type of lease, a corporation owning the property sells it to the lessor. The lessor pays for the property instantly but leases it back to the seller. Thus, the seller becomes the lessee. In this arrangement, the investment is retained by the seller while ownership is with the lessor, who is the buyer. This agreement aims to enable the owning firm to acquire financing to manage the company and its asset.
Complete and non-pay-out lease
In a complete pay-out lease, the lessor leases the entire worth of the leased property while they repeatedly rent out the same property in a non-pay-out lease.
Specialised service lease
The lessor or the property owner is an expert in the asset they are renting out. Besides leasing out the asset, they provide the tenant with personalised attention such as electronics, air conditioners, etc.
Net and non-net lease
Net leases are classified as single net leases, double net leases, and triple net leases. The lessee pays the rent after reducing the expenses to be paid for maintenance, taxes, insurance, repair costs, etc. In a net lease, a lessor is not concerned about the upkeep costs of the property. The lessor only provides financial services.
In a non-net lease, the lessor is liable for maintenance, insurance and other expenses.
Sales aid lease
If the lessor joins an advertising alliance with a producer, this type of lease is known as a sales assistance lease.
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.
Tax oriented lease
A tax-oriented lease is an arrangement used to claim tax benefits, which does not involve borrowing on collateral but counts as a lease.
Import lease
In this type of lease, a firm offering the asset for lease may be located in a foreign country. However, the lessor and the lessee may be from the same country.
International lease
In this type of lease, the participants may be from different countries, similar to a cross-border lease.
Commercial leases and their types
In India, commercial leases are signed for a defined period. There is a time limit after the agreement terminates.
Gross lease
A gross lease is also known as a full-service rental, wherein the lessor covers the property expenses, such as taxes, licensing and upkeep costs, from the rent paid by the tenant. The owner is entirely liable for the property. This type of lease is used widely in multi-tenant arrangements. The contract should mention the costs of renting the business space and the terms within which the charges may rise in future.
Net lease
A net lease is a commercial lease wherein the tenant pays for the leased area as well as for all or a portion of the typical expenses such as maintenance or operation, taxes, insurance, utility payments, etc. This is beneficial for the landlords as it allows them to manage their costs. However, the organisation must have adequate capital for unplanned expenses.
Modified gross lease
A modified gross lease is similar to a gross lease. However, in this type of lease, the lessor requests the rent in a lump sum. There is scope for negotiation between the sides. The parties 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.
FAQs
What is a lease in India?
A lease is an agreement in which one party grants a right to use their property or any asset to another party in return for payment for a specific period of time.
What exactly is a concurrent lease?
A concurrent lease refers to a lease that runs concurrently with another lease on the same premises.
Who is a lessor?
A lessor is the owner of an asset who has rented out his property in return for payment for a specified period of time.
Is the lease amount refundable?
The payment made as rent when renting a property is not refundable. However, the security deposit is refundable.
What is a commercial lease?
A commercial lease refers to a formal contract wherein the owner rents out the property that will be used for business purposes.
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