From Wikipedia, the free encyclopedia Leasing
Leasing
Leasing is a process by which a firm can obtain the use
of a certain fixed assets for which it must pay a series of
Rent
contractual, periodic, tax deductible payments. Rent is a requirement of leases in common law jurisdic-
The lessee is the receiver of the services or the assets tion, but not in civil law jurisdiction. There is no require-
under the lease contract and the lessor is the owner of ment for the rent to be a commercial amount. "Pepper
the assets. The relationship between the tenant and the corn" rent or rent of some nominal amount is adequate
landlord is called a tenancy, and can be for a fixed or an for this requirement.
indefinite period of time (called the term of the lease).
The consideration for the lease is called rent. A gross
lease is when the tenant pays a flat rental amount and
Real estate
the landlord pays for all property charges regularly in- (See rental agreement and leasehold estate for more de-
curred by the ownership from lawnmowers and washing tail.)
machines to handbags and jewellry.[1] There are different types of ownership for land but,
Under normal circumstances, a freehold owner of in common law states, the most common form is the ’fee
property is at liberty to do what they want with their simple absolute’, where the legal term fee has the old
property, including destroy it or hand over possession of meaning of real property, i.e. real estate. An owner of
the property to a tenant. However, if the owner has sur- the ’fee simple’ holds all the rights and privileges to that
rendered possession to another (the tenant) then any in- property and, subject to the laws, codes, rules and regula-
terference with the quiet enjoyment of the property by tions of the local law, can sell or by contract or grant, per-
the tenant in lawful possession is unlawful. mit another to have possession and control of the prop-
Similar principles apply to real property as well as erty through a lease or tenancy agreement. For this pur-
to personal property, though the terminology would be pose, the owner is called the lessor or landlord, and the
different. Similar principles apply to sub-leasing, that is other person is called the lessee or tenant, and the rights
the leasing by a tenant in possession to a sub-tenant. to possess and control the land are exchanged for some
The right to sub-lease can be expressly prohibited by the payment (called ’consideration’ in legal English), usually
main lease. a monthly rent. The acceptance of rent by the landowner
from a tenant creates (or extends) most of the rights of
tenancy even without a written lease (or beyond the time
Formality limit of an expiring lease). Although leases can be oral
A tenancy for years greater than 1 year must be in writ- agreements that are periodic, i.e. extended indefinitely
ing in order to satisfy the Statute of Frauds. and automatically, written leases should always define
the period of time covered by the lease. In the 1930s, the
British government introduced infinite leases, only to re-
Term move the power to create these in the early 1990s. A lease
The term of the lease may be fixed, periodic or of indefi- may be:
nite duration. • a fixed-term agreement, in other words one of these
If it is for a ’tenancy for years’, the term ends auto- two:
matically when the period expires, and no notice needs • for a specified period of time (the "term"), and
to be given, in the absence of legal requirements. end when the term expires;
The term’s duration may be conditional, in which • conditional, i.e. last until some specified event
case it lasts until some specified event occurs, such as the occurs, such as the death of a specified
death of a specified individual. individual; or
A periodic tenancy is one which is renewed automat- • a periodic agreement, in other words renewed
ically, usually on a monthly or weekly basis. automatically
A tenancy at will lasts only as long as the parties wish • usually on a monthly or weekly basis
it to, and may be terminated without penalty by either • at will, i.e. last only as long as the parties wish it
party. to, and be terminated without penalty by either
It is common for a lease to be extended on a "holding party.
over" basis, which normally converts the tenancy to a pe- Because ownership is retained by the lessor, he or she al-
riodic tenancy on a month by month basis. ways has the better right to enforce all the contractual
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From Wikipedia, the free encyclopedia Leasing
terms and conditions affecting the use of the land. Nor- of the car to another (if P does part with possession,
mally, the contract will be express (i.e. set out in full and, this can be a theft of the car from F).
hopefully, plain language), but where a contract is silent There are two principal types of leasing, depending upon
or ambiguous, terms can be implied by a court where the party taking the risk of the value of the vehicle (or
this would make commercial sense of the transaction be- other leased property) at lease end. In the U.S. this is
tween the parties. One important right that may or may called Closed-end leasing. In other jurisdictions, it is
not be allowed the lessee, is the ability to create a sub- called hire purchase, lease purchase or finance leasing.
lease or to assign the lease, i.e. to transfer control to a These transactions are complicated. The most common
third party. Hence, the builder of an office block may cre- problem arises when O makes specific representations as
ate a lease of the whole in favour of a management com- to the quality and reliability of the car to P during the ini-
pany that then finds tenants for the individual units and tial negotiations. If what is said induces P to buy the car
gives them control. from O, those representations would usually be enforce-
Under common law, a lease should have three essen- able against O. But, in this transaction, O first sells the car
tial characteristics: to F who makes no representations to P. The laws vary
1. A definite term (whether fixed or periodic) from state to state on the extent to which P might be al-
2. At a rent lowed a remedy if the car proves to be of poor quality.
3. confer exclusive possession To clarify the concept, the owner of tangible mov-
ables has the power to keep possession and only to trans-
Tangible personal property fer control. This may be for:
• short- or long-term storage (e.g. leaving a passport
An owner can allow another the use of a vehicle (such as with hotel staff or depositing valuable property in a
vehicle leasing of a car, a truck or an airliner) or a com- bank vault — a hotel or bank holding property is a
puter either for a fixed period of time or at will. This can bailee); or
be a simple leasing transaction, or it can be a transaction • for delivery purposes (e.g. using a carrier to
intended to allow the user the right to buy the item at transport goods to a specific destination); or
some future time. • it may be a form of mortgage — a pawnshop holds a
• In a simple lease (rental) of a car, the lessee pays the pledge over the goods deposited until the money
lessor a rental for the use of the car during the lent is repaid.
agreed period which may be a few days (e.g. for a Leasing is a common method by which airlines acquire
holiday trip) or longer where it is more economic to their aircraft, usually from companies specialised in the
pay for use rather than pay for the ownership of an field of Commercial Aircraft Sales and Leasing. Aircraft
asset of depreciating value. Normally, only the lessee leasing transactions are typically divided into finance
will be allowed to use the vehicle and, in such a case, leasing and operating leasing.
the lessee has possession and control. But, the lessor Leasing is also used for ships, in which case the agree-
could be an employer who allows a third person the ment is structured as a bareboat charter.
use of the car to visit clients. Businesses often choose to lease rather than buy of-
• In a lease with the possibility of purchase, O could fice equipment, including computers. Since office equip-
allow P to lease the car for a specified period of time. ment depreciates rapidly, leasing can be more cost-effi-
If all the rental payments are made in full, P will cient than ownership.
then be allowed to buy the car at the contractual In addition, more and more unconventional items are
purchase option price. In a consumer lease subject to becoming available for lease, such as handbags and luxu-
the federal Consumer Leasing Act and the Truth in ry watches.
Lending Act, the purchase option price can not be a
"bargain" purchase, that is, it cannot be less than the
originally estimated fair market value. A "bargain"
Real property
purchase creates an installment sale, to which the Whether it is better to lease or buy land will be deter-
Truth in Lending Act (TILA) applies including the mined by each state’s legal and economic systems. In
standardized disclosures, most importantly the those countries where acquiring title is complicated, the
Annual Percentage Rate (APR). Typically, the vehicle state imposes high taxes on owners, transaction costs
dealer or other personal property seller offers the are high, and finance is difficult to obtain, leasing will
leasing terms and contract of a third party finance be the norm. But, freely available credit at low interest
company. Hence, O leases the vehicle to P, and upon rates with minimal tax disadvantages and low transac-
execution of the contract simultaneously sells tion costs will encourage land ownership. Whatever the
ownership of the car to F and assigns the lease system, most adult consumers have, at some point in
contract to F. It is standard for the contractual terms their lives, been party to a real estate lease which can be
to prohibit P from parting with possession or control as short as a week, as long as 999 years, or perpetual (on-
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From Wikipedia, the free encyclopedia Leasing
ly a few states permit ownership to be alienated indefi- fine, and control their interactions, operation and man-
nitely). For commercial property, whether there is a de- agement, as well as the division of costs for the operation
preciation allowance depends on the local state taxation of the site, are typically very complex.
system. If a lease is created for a term of, say, ten years, Retail leasing often requires the parties to address is-
the monthly or quarterly rent is a fixed cost during the sues typically not addressed at all in other types of com-
term. The term of years may have an asset value for bal- mercial leasing which have no retail component. These
ance sheet purposes and, as the term expires, that val- additional challenges include such topics as exclusives
ue depreciates. However, the apportionment of relief as and restrictive covenants, radius restrictions on near-
between business expense and depreciating asset is for by self-competition, co-tenancy, no-build areas and vis-
each state to make (all that is certain is that the lessee ibility corridors, parking ratio assurances, signage con-
cannot have a double allowance). cerns (including pylons, monuments, and criteria), CAM
and CAM caps and controls (including the "cumulative"
Private property and "non-cumulative" concepts), continuous operating
Rental, tenancy, and lease agreements are formal and in- covenants, and much more.
formal contracts between an identified landlord and ten-
ant giving rights to both parties, e.g. the tenant’s right to Difference Between Buying and
occupy the accommodation for an agreed term and the
landlord’s right to receive an agreed rent. If one of these Leasing
elements is missing, only a tenancy at will or bare licence There are many distinct differences between buying and
comes into being. In some legal systems, this has unfor- leasing, regardless if such a transaction or agreement ap-
tunate consequences. When a formal tenancy is created, plies to property, machinery, equipment or other assets.
the law usually implies obligations for the lessor, e.g. that The difference lies in that a Lease is conceptually very
the property meets certain minimum standards of habit- similar to the principle of “borrowing.” The ownership of
ability. With a bare licence, some states do not imply any the leased property (be it land, equipment, merchandise,
significant lessee protections or etc.) is not transferred under the terms of the lease
A tenancy agreement can be made up of: agreement. The lease gives the lessee the right to use the
• express terms. These include what is in the written assets covered under the agreement for the duration of
agreement (if there is one), in the rent book, and/or the contracted term, however, upon the completion of
what was agreed orally (if there is clear evidence of said term the lessee is required to return the assets in
what was said). question to the lessor, thereby completing the terms of
• implied terms. These are the standard terms the agreement. In a general example having to do with
established by custom and practice or the minimum an automobile lease, the vehicle is due back to the dealer-
rights and duties formally implied by law. ship at the conclusion of the lease term. Once the vehicle
is returned, the automobile lease agreement is completed
Commercial property and the parties (lessor and lessee) separate with no fur-
Generally speaking in the modern US legal framework, ther obligations to each other (assuming there is no dam-
commercial real property leases fall into one of just a age on the vehicle entitling the dealer to some further
few categories: Office, Retail, Warehouse, Ground, and a compensation). The lessee has no further claim or right
catch-all hybrid often referred to as "Mixed Use". Each to use the vehicle and the lessor, or car dealer no longer
has certain typical characteristics, although Ground leas- collects any payment from the former lessee – the previ-
es may differ somewhat, taking on some characteristics ous driver.
of Retail leasing when associated with a retail project, It should be noted, however, that many lease agree-
like a shopping center; and although Mixed Use projects ments contain clauses and addendums that outline addi-
can vary greatly depending upon the various inclusions tional rights, or options for the lessee, to be exercised at
and the size of the overall project, among other things. will upon the conclusion of the lease (there are numer-
It is widely appreciated by those who specialize in com- ous equipment lease types[2] with individual features). In
mercial leasing, including the business side and the legal automobile leases[3] as a general example, a lessee may
side, that, other than hybrids such as Mixed Use project have an option to purchase the vehicle, thereby restruc-
leasing, Retail leasing can have the most complexity. turing the agreement and ultimately obtain the owner-
Mixed Use projects often have elements of most or ship of the asset previously leased. In the example of a
all of the other categories, not infrequently including a property lease, the renter (or lessee) may have the option
hotel, office building, ground floor retail with residential to extend the lease, under pre-determined terms. Such
condominium above and a parking garage. The interplay scenarios are numerous and are typically pre-set during
of all these different components with each other and the initial creation and negotiation of the agreement be-
the underlying property documents which describe, de- tween the parties.
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From Wikipedia, the free encyclopedia Leasing
Purchasing, on the other hand, involves an agree- comprehensive maintenance programs offered by lessors
ment that outlines the terms under which the purchaser while still paying a discounted premium due to the fact
acquires ownership of the desired item, property or as- that the asset is being leased, not purchased.
set. The purchase agreement delineates the purchase Cost In the event of a purchase, the full value of the
price and the terms under which it is to be paid for by asset must be paid to the seller. In the event of a lease,
the buyer. The overall purchase price can be [[amortized] however, only a portion of the full value is assessed, typi-
over a period of time as in the case of financing, or it can cally around 50%, however the figure varies based on the
be paid in full, resulting in the instant transfer of owner- duration and type of lease. As a consequence, a lessor can
ship to the purchaser. In the event that the purchase is gain the use of a much needed asset for a fraction of the
financed over a period of time, the ultimate price paid for full price of ownership. In many instances, this can bet-
the item or asset can be greater than the original price ter serve the lessee that an outright purchase would. As
due to interest. For an individual deciding between buy- a corollary, a lessor could be granted the use of an asset
ing or leasing, it is crucial to understand the pros and that could otherwise be cost prohibitive.
cons of each.
Responsibility In a scenario involving business enti-
ties that typically rely on functional equipment for on- Advantages
going operations and to stay ahead of competitors, re- For businesses, leasing property may have significant fi-
sponsibility is a key factor. In a purchase, the responsibil- nancial benefits:
ity for the equipment falls solely on the shoulders of the • Leasing is less capital-intensive than purchasing, so
business owner. While there are various insurance plans if a business has constraints on its capital, it can
and warranties available to protect the owners, in case grow more rapidly by leasing property than it could
of damage or faulty manufacturing, the ultimate respon- by purchasing the property outright.
sibility for the life of the equipment, after a purchase is • Capital assets may fluctuate in value. Leasing shifts
complete, falls on the buyer. In a lease scenario, a lessee risks to the lessor, but if the property market has
is only responsible for the equipment for the duration of shown steady growth over time, a business that
the lease and while he or she remains in possession. depends on leased property is sacrificing capital
Resale Value In case of a purchase, the full value of gains.
the asset is transferred to the purchaser, as the new own- • Because of investments which are done with leasing,
er. This means that in case of resale at a subsequent new businesses are formed. Furthermore,
time, the full price for which the asset is resold can be unemployment in that country is decreased.
collected by the new owner. In case of an automobile • Leasing may provide more flexibility to a business
purchase, for example, an individual can, at a later date which expects to grow or move in the relatively
freely resell the vehicle and collect its value, albeit a de- short term, because a lessee is not usually obliged to
preciated amount from the original purchase price. In a renew a lease at the end of its term.
lease, the lessor has no claim to the asset upon the con- • In some cases a lease may be the only practical
clusion of a lease, thereby the monies that were paid in option; such as for a small business that wishes to
the course of the lease cannot be, in part or in whole be locate in a large office building within tight
recouped through a resale of the asset. locational parameters.
Depreciation Depreciation is a major consideration • Depreciation of capital assets has different tax and
for individuals deciding between buying and leasing. For financial reporting treatment from ordinary
assets that suffer from significant depreciation, either as business expenses. Lease payments are considered
a result of regular wear and tear or through becoming expenses, which can be set off against revenue when
obsolete upon the release of newer versions of the same calculating taxable profit at the end of the relevant
materials (particularly applicable in the case of technolo- tax accounting period.
gy) leasing can prevent a significant loss of value. In busi-
ness, there exists a basic rule of thumb: “If it appreciates, Disadvantages
buy it. If it depreciates, lease it.” Leasing could permit the For businesses, leasing property may have significant
use of the equipment while it is new and upon the com- drawbacks:
pletion of the lease, it can be simple to upgrade by virtue • A net lease may shift some or all of the maintenance
of a new lease. In case of a purchase, however, an individ- costs onto the tenant.
ual may be “stuck” with an obsolete asset with no means • If circumstances dictate that a business must change
of recouping the cost of its acquisition. its operations significantly, it may be expensive or
Maintenance Because in the instance of a lease the otherwise difficult to terminate a lease before the
ultimate ownership is retained by the lessor, it is in the end of the term. In some cases, a business may be
lessor’s best interest to maintain the asset in its best able to sublet property no longer required, but this
working order. Therefore, lessees can often benefit from may not recoup the costs of the original lease, and,
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From Wikipedia, the free encyclopedia Leasing
in any event, usually requires the consent of the • Substance: the lessee legal right to use the property.
original lessor. Tactical legal considerations usually National accounting standards vary in the tests that de-
make it expedient for lessees to default on their cide if the lease is a:
leases. The loss of book value is small and any • Capital or Finance lease, which is considered a
litigation can usually be settled on advantageous financing transaction - as the lessor has less of the
terms. This is an improvement on the position for risks of ownership, such as the value of the
those companies owning their own property. equipment in future years.
Although it can be easier for a business to sell • Operating lease, whose term is short compared to
property if it has the time, forced sales frequently the useful life of the asset, where the lessee does not
realise lower prices and can seriously affect book have to show the lease on their balance sheet.
value.
• If the business is successful, lessors may demand
higher rental payments when leases come up for
References
renewal. If the value of the business is tied to the use [1] "If you want it, rent it ... from a ’must have’
of that particular property, the lessor has a handbag to an Aston Martin", The Observer,
significant advantage over the lessee in negotiations. 2009-01-04. Retrieved on 2009-09-09.
[2] "Equipment Lease Types", SelectBusinessCredit.com.
Retrieved on 2011-08-17.
International usage [3] "Automobile Leases", "LeaseGuide.com". Retrieved
The practice of leasing is well established in most coun- on 2011-08-17.
tries of the world.[4] [4] The World Leasing Yearbook 2008 edition ranks the
However the benefits (in particular the tax benefits) top 50 countries
to the lessee and lessor will vary widely depending on
national accounting standards and tax regulations. These
largely divide into countries observing:
External links
• Legal Form: the lessors legal ownership of the • Landlord-tenant law links to 50 states (US)
property, • Photocopier leasing and potential pitfalls (UK)
Retrieved from "http://en.wikipedia.org/w/index.php?title=Leasing&oldid=450327745"
Categories:
• Business law
• Business terms
• Contract law
• Land law
• Leasing
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