different types of leases

By | August 9, 2011

A lease, by legal definition, is nothing but an enforceable contract between the lessee (user) and the lessor (owner). The user has to pay the owner a certain amount of rent to use his asset or property for a certain period of time. A typical lease contract generally spells out all the terms and conditions involved in a merchandise or asset rental agreement.

Depending on the variation in the elements of lease, they can be classified into certain types as follows:

  • Finance lease and operating lease: In this kind of lease, the lessor is only the financier. Finance lease, also known as Capital lease or Full Pay Out lease, is a commercial arrangement in which the lessee has full control over the asset providing them all the risks and benefits of an ownership. Generally, the lessee gets over the ownership at the end of the asset’s economic life. On the other hand, in operating lease, the lessee does not owe full control over the rewards and risks of the asset.
  • Sale and Lease Back and Direct Lease: Here the lessee gets his asset sold to the financier with an agreement of paying back a fixed rental per annum. On the contrary the direct lease or tripartite lease includes three different parties namely the equipment supplier, lessor and the lessee.
  • Single Investor Lease and Leveraged Lease: In the former, the money required to purchase an asset comes from the same source while in the latter, the financier puts equity to   20% to 30% of the cost and the user lends a collateral balance with the equipment.
  • Domestic and International lease: As the name suggests, lease dealings with the same or different countries are called Domestic and International lease respectively.

It is a must for the user to carefully study all the pros and cons of the deal before taking a lease. A careful knowledge of the details of the process should be absolutely clear to the parties.

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