Leasing is a generic phrase when negotiating the land or property. Therefore, when individuals decide to rent out their flat or property, they could choose leasing.
Notably, people would miss out on minor details of a lease agreement, causing a commotion. Both the tenant and the landlord should be aware of their rights and liabilities to avoid stumbling blocks and enjoy a smooth transition such that the landlord safeguards his priorities. A tenant enjoys the property he rented.
Table of Contents
Leasing is when a person, through a contract, conveys or rents his property to another person for a determined period in exchange for a periodic or lump sum payment.
This article introduces four terms related to the leasing of immovable property, which are as follows:
- Lessor- The lessor is the person who transfers the immovable property.
- Lessee- The transferee of immovable property is the lessee.
- Premium- The cost of obtaining a lease on immovable property.
- Rent- This is the money or service that is provided.
Components of a Valid Leasing Agreement
For a leasing agreement to be valid; it’s essential to satisfy the following specific conditions:
Competence of Lessor and Lessee
For a valid lease, both the lessee and lessor should be sufficiently competent to form a contract. To be competent, a lessor and lessee must be:
- The lessee should be a major.
- The lessor must have title to the property and the authority to make the lease.
- The lessor and lessee must both be of sound mind.
Subject Matter of Leasing Agreement
The lease’s subject matter must be immovable property, such as a flat, house, or loft.
Such a leasing contract must include some form of consideration. A valid lease may not exist in the absence of adequate and legal consideration; instead, it would be treated as a gift.
The consideration should usually be in the form of a premium plus rent, but it could also be a premium or rent only.
A lease for an immovable property must be for a minimum of 11 months. Such leasing agreement could only be made by a registered instrument if the duration exceeds a year, that is, 12 months or more, as per Section 107 of the Transfer of Property Act, 1882.
Delivery and Acceptance
The lessor must deliver the contract, and the lessee must accept the contract without undue influence or coercion. The lease becomes effective when the lessee agrees with the contract.
Different Types of Lease
Leases are broadly classified into the following two types:
- Financial lease
- Operational lease
Though the device used in a Financial Lease is leasing, the purpose and effect are virtually financings – leasing of funding.
The lessor will provide the money required by the lessee to purchase an asset; in exchange, the lessee will make payments in the form of lease rentals.
The lease amount is the total amount financed. A financial lease is a clone of a lease. This lease should be treated as a lease, with the lease amount as the principal and interest getting charged.
Lease for Operations
This is a non-monetary lease. An operating lease refers to any lease that is not a financial lease. The lessor does not operate the asset leased in a financial lease; he merely finances it.
The term ‘operating lease’ is used in contrast to financial leases to indicate that the lessor is ‘operating’ the asset. Therefore, an operating lease is any lease in which the lessor takes a risk other than a simple financial risk. This lease should be treated as a lease with no principal and the entire lease amount paid in instalments as a special interest.
Advantages of Leasing
- The most important advantage of leasing is flexibility, and the leasing company adjusts the arrangements to satisfy the needs of the lease.
- When comparing the term loans from financial institutions, leasing requires less documentation.
- This lease is a different way for getting or other financial services from a financial institution. Therefore, banking and financial institutions are now venturing into the leasing business because this method of financing is more appealing to manufacturing units.
- A leasing company may provide complete (100%) financing for the cost of equipment. However, banks and other financial institutions may not provide for the same.
- The ‘Sale and Lease Bank’ arrangement permits lessees to borrow in a financial emergency.
- The lessee may be eligible for tax benefits depending on his tax status.
Disadvantages of leasing
- The cost of interest in leasing is exceptionally high.
- At the end of the lease period, the asset reverts to the owner, and the lesser loses his claim to the residual value.
- Leasing is ineffective for starting new projects because the rentals become due soon after the assets are acquired.
- In the majority of cases, the lessor leases out assets that he purchased with the help of bank credit. If the lessor cannot make the payment to the bank, the bank will seize the asset, much to the detriment of the lessee.
This article clarified certain aspects in leasing, like the essential elements of the leasing agreement, the lessor and the lessee, which are an integral and necessary part of a lease deed.
The lessor must disclose facts and avoid interruptions while the lessee is leasing the property. On the other hand, a lessee needs to take reasonable care of the property while also paying his or her rent. A property lease is distinct from a property sale, and this article clarifies that aspect of property law.
What is leasing?
A lease is a legally binding contract in which one party agrees to rent the property owned by another party. In exchange for the tenant's (also known as the lessee's) use of the property, the lease guarantees regular payments for a specified period to the lessor—the property owner or landlord.
What is business leasing?
Leasing is a method of renting a business asset such as a coffee machine. Monthly payments are made, and the leasing company provides and maintains the leased item.
How is a lease determined?
A lessee accepts a new lease of the leased property from his lessor to take effect during the existing lease term. It is an implied surrender of the previous lease, and such lease governs.
What is the distinction between a lease and a licence?
A lease is a transfer of an interest in a specific immovable property, whereas a licence is bare permission with no interest transfer.