What is Leasing and how does it work

A lease is a contractual agreement permitting the user to pay the owner for the use of an asset.

Properties, vehicles and buildings are common assets that can be leased. For example, a lease can be agreeing to rent a property to a tenant in return for regular lease payments, more commonly referred to as rent instalments. Industrial and business equipment can also be leased in return for fixed monthly repayments.

The arrangement is made between the lessor, who is the owner or supplier, and the lessee, who is the user. If the terms of the lease are met, the lessee should be in quiet possession of the assets for the contractual period. During the lease agreement, the lessor is unable to change or alter the terms of the arrangement.

The first record of leasing dates to the Romans who developed a body of law for the lease of ‘moveable and immovable’ property. However, leasing as we know it today began in 1877 when the Bell Telephone Company began to lease telephones in the U.S. 

Once a lease agreement has been finalised, the lessee is granted the right of use for the leasing asset. However, the leasing asset remains the property of the lessor, unlike an outright cash purchase.

When leasing, the lessee is required to pay for any additional costs, maintenance, and insurance for the leased asset.

Personal and business leases use the same framework. Business leases are agreed upon for limited companies, sole traders, and partnerships instead whereas personal leases are for the personal use of the leased asset.

When a lease expires or comes to an end the lessor can choose to extend the lease if the lessee wishes to continue the same terms. If you do not wish to continue leasing the asset at the end of the contractual period, you can hand back the right of usage and end the lease.

Leasing a business is the temporary transfer of assets such as vehicles, buildings, or industry equipment from one business to another.

The lessor will deliver the assets to the lessee in return for regular lease payments under the lease agreement.

Businesses may choose to lease premises, vehicles and equipment as leasing provides flexible terms, less initial expense and more available funds for other business operations.

A business lease is a legal contractual agreement between the lessor and a business. The lease gives the business the right to use the leased assets for their business operative duties.

The difference between a business and a personal lease is that a business lease is agreed upon on behalf of a company rather than an individual. The leased assets are used to support the running of the business instead of for personal benefit.

The lessee business is required to make lease payments to the lessor in return for exclusive possession of the assets for a set period stated in the contract.

The three main types of leasing are finance leasing, operating leasing and contract hire.

Finance leasing is a long-term lease provided over the life expectancy of the leased asset. Once the lease ends, you can sell or dispose of the equipment as it will not be in suitable condition to return to the lessor.

Over the lease period, the lessor will have recovered the total cost of the asset through fixed monthly lease payments.

During the leasing contract, the lessee is responsible for the maintenance and insurance of the assets despite not owning the equipment.

Operating leasing is a suitable option if you do not require the equipment or asset for its entire working life.

At the end of the lease term, the lessor will collect the assets unless there is an agreement to extend the lease.

The lessor is also responsible for covering any additional costs, maintenance and insurance of the leased assets.

Contract hire is a common lease used by hire companies when supplying assets such as company cars.

While the asset is in the lessee’s possession, the lessor company is responsible for the management and maintenance which includes repairs and servicing. 

A break clause allows both parties to terminate the lease agreement before the end of its term. Break clauses are common in property lease agreements in accordance with English property law. This clause allows a tenancy to end before the date stated in the lease contract.

If a break clause is added to your lease, both the lessor and lessee have the right to end the arrangement early.  Break clauses provide both the lessor and lessee flexibility within their agreement in case circumstances change for either party.

Several factors will impact the lease liability. This includes the lease term and lease payment.

Lease liabilities are the financial obligation to make the required lease payments stated in the contract with the lessor. You must record the lease liability on the balance sheet which is a summary of financial transactions of an individual or organisation.

Before recording your lease liability ensure you are working with the correct figures and that the lease term and lease payment are reliable data.

When a lease term comes to an end there are a few different options that you can choose from.

Depending on the original terms agreed within your leasing contract you may decide to return the leased asset, extend or start a new lease or buy out the lessor.

Usually, at the end of a lease term, the lessee returns the asset to the lessor to end the contract. This means that the lessee no longer has the right of use to the leased asset as the lease is now finished.

However, the lessee and lessor may agree to renew the leasing contract or extend it for an extra period. By extending a lease, you agree to the original terms. If you choose to start a new lease you may be able to renegotiate terms with the lessor or lessee.

Another option is to buy out the lessor. If you are leasing a property, as a leasehold tenant you may be able to buy out the freehold.

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