Lease

A lease is an agreement under which certain rights are transferred from an owner of a property to the lessee. It is either for a fixed period of time or for forever. Under this, all rights are not transferred permanently only partial transfer takes place.[1] Under this, ownership remains with the owner or lessor however rights over assets are enjoyed by the lessee on account of rent paid by him to the lessor. Rights which can be retained by the owner can become subject to the lease like patent right, copyright, right of way, etc. Leases take place when companies are not able to afford building costs; then they rent those buildings. Following are the main things which are mentioned under lease contract – (1) Name and description of both parties, i.e., lessor and lessee (2) Payment which lessee has to made to the lessor in a specified period of time (3) Time period for which contract of lease takes place (4) Penalties on account of late payment. Indian Contract provisions are applied to the lease agreement. [2]

Essentials of Lease

1. Parties – There must be two parties, i.e., lessor and lessee. A single party cannot form a lease contract.
2. Competency – Both parties of the contract, i.e., lessor and lessee, must be competent to contract. Also, valid conditions which are mentioned under Section 10 of the Indian Contract Act must be fulfilled.
3. Time Period – Section 106 of the Transfer of Property Act talks about the situation in which duration of the lease Contract is not mentioned. According to the provisions which are mentioned under this Section, leases related to the agricultural or manufacturing assets which are immovable must be year to year basis, and for other purposes, it must be month to month.
4. Consideration – Consideration must be paid either it is in monetary form, or it can be in another form also. It is must be paid time to time; otherwise, the penalty will be imposed.[3]
5. Acceptance – All the terms and conditions which are mentioned in the lease contract must be accepted by both the parties; otherwise, the contract becomes void if parties are not in consonance.
6. Lease contract must be formed according to the Section 107 of the Contract Act.[4]
7. The lease is a type of which can be enforced against the whole world (right in rem).[5]

Types of Lease

1. Absolute Net Lease – The tenant looks after the entire responsibility, including insurance, taxation, and repairs, in the case of an absolute net lease. In single-tenant structures, the absolute model is common, where the owner of the property constructs residential units to meet a tenant’s needs. For a defined period, the owner hands over the finished structure to the tenant.

The tenants, in such a situation, typically involve large companies who accept the terms and conditions and are able to bear the discretionary spending.

1. Triple Net Lease – Expense categories which are associated with the triple net lease are insurance, maintenance, and real property taxes. Property owners pass all these expenses in the form of rent excesses to the tenant; hence these expenses are also called as operating or pass-through expenses. These excess amounts in some cases are known as taxes, insurance, and common area (TICAM).

A tenant exerts his control over the exterior maintenance and other infrastructure of the building under a single tenant rent. Under the multi-tenant arrangement, the entire maintenance responsibility lies on the property owner. For the operating cost, every tenant has to pro-rata to the landowner.

1. Modified Gross Lease – Under modified gross lease whole burden transfers on the property owner. All the expenses like insurance, maintenance and taxes are paid by the owner himself on the basis of terms and conditions.

The lease contract, therefore, explicitly states that the landlord is responsible for the roof and other construction elements of the house. Under this type of lease, agreement owners take care of all the properties; therefore rent is higher in comparison to other forms of the lease agreement.

This type of lease is beneficial for the tenants because the owner himself takes care of all the risks pertaining to the maintenance of the building. Tenants do not play any role in the maintenance of the building, and their rates are relatively the same all year.

1. Full-Service Lease – As the name describes under this lease, all the operating cost of the building is on the owner of the property; therefore, the tenant has to pay higher rent. But there are some exceptions like telephone bills and data cost is paid by the tenant himself. Such an arrangement is also beneficial for the tenant, but there are some disadvantages, also such as the owner may charge an extra amount on rent to recover the tenancy cost. Most owners prefer full-service lease agreement because of its full control over the whole assets.[6]

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Advantages from the viewpoint of the Lease

1. Saving of the Capital – By supplying 100 percent financing, leasing pays the entire cost of the machinery used in the company. The lessee shall not have any margin money or reimburse it as there is no down payment. In this way, money or financial savings may be used for more productive purposes, such as inventory transactions.
2. Minimum delay – In contrast to the lengthy process used in term-loan funding, lending firms typically need far less time to process the lease proposal. Thus, by taking it on loan, a company can prevent delays in the use of a resource.
3. Easy Source of Finance – One of the leading methods of intermediate and long-term finance is leasing. No asset mortgage is required since the ownership of the rented asset resides with the lessor and is not passed to the lessee. Also, restrictive provisions which are imposed on the term financing are avoided. The initial cost of leasing-based borrowing is also significantly smaller than that of long-term lending.
4. Shifting the Risk of Obsolescence – A business would bear the burden of obsolescence in the modern age of constantly evolving technology if it buys the asset. By acquiring the use of the rented asset rather than owning it, the corporation (lessee) will conveniently transfer this liability to the lessor.
5. Increase Liquidity – The agreement for selling and leaseback helps a corporation to boost its liquidity status through the realization of cash from the sale of capital assets and the continuation of its commercial usage. Thus, by lease finance, the lessee will preserve its working capital problem.
6. Conserving Borrowing Capacity – Leasing is a method of funding that does not limit or impair the leased firm’s borrowing ability. It is known to be a concealed type of debt that does not appear on the balance sheet of the lessee as a liability. Thus, the debt-equity level of the business acquiring the use of an asset by leasing does not impact it.
7. Higher Return on Capital Employed – Although the lessee simply attains the right to use the property without buying it, the resource does not show on the balance sheet’s asset side. This means higher profits against working capital and a high rate of return on invested amounts.
8. Convenience and Flexibility – Operating or utility leases are normally cancellable, allowing the leasing company to void the lease if the asset is no longer expected to be used. Therefore, the way fixed assets are funded is very simple and versatile.[7]

Disadvantages of Leasing for Lessee

1. Leasing rentals provide the lessor’s margin as well as the risk of obsolescence and are thus considered as a way of higher-cost financing. Owing to depreciation and investment gain if any, even lessee loses out on tax benefits.
2. If the lessee terminates the deal before the expiry of the lease agreement, then he may be liable to fines.
3. Owing to the worsening of the financial condition of the lessor or the winding up of the leasing business, the lessee may be deprived of the use of an estate.
4. Since the lessee is not the owner of the property, therefore no substantive adjustments can be made to the asset by him. Contrary to this, the buyer can change or alter the asset to maximize its usefulness in the event of a direct purchase.
5. There are some asset ownership benefits, such as depreciation and investment allowance in the event of a lease; the lessee is not entitled to such advantages.[8]

Conclusion

For different purposes, such as renting a home, leasing a farm, and so on, a lease arrangement has often been made by us one or many times in life. It is a statutory arrangement that grants the lessee the freedom to possess the land for the tenure referred to therein but does not grant them the right to own the property. The lease usually contains specifications, directions and conditions set down and agreed by the lessor and by all parties for the term of their possession on the land. Therefore, the leasing agreement is a very important document for both sides, the one who rents it out and the one which rents out his house. There are some criteria to be included whether we are leasing or renting out a house. For e.g., if we are creating an arrangement for 11 months, one concern is whether or how the implication will be made for the termination of the tenancy, and on what date the tenancy will end.

REFERENCES 

[1] Lease: Meaning, Definition, Essentials of the valid lease Property Law, available at: https://www.srdlawnotes.com/2018/03/lease-meaning-definition-and-essentials.html (last visited on December 25, 2020).

[2] Ritika Ranka, Lease: Introduction, Concept, Essentials and Conditional Leases, available at: https://www.legalbites.in/lease-introduction-concept/ (last visited on December 25, 2020).

[3] T. Ramakrishnaiah v. N. Seshadri, AIR 1972 Andhra Pradesh 218 (220).

[4] Bhagat Ram v. Keshav Deo, AIR 1965 Assam 55.

[5] Krishnaswamy Nadar v. Subbayya Pillai, (1976) 1 Mad LJ 151 (153) (Mad).

[6] Lease, available at: https://corporatefinanceinstitute.com/resources/knowledge/other/lease/ (last visited on December 26, 2020).

[7] Dhaval S, Advantages and Disadvantages of Leasing for the Lessee, available at: https://www.businessmanagementideas.com/financial-management/leasing/advantages-and-disadvantages-of-leasing-for-the-lessee/4269 (last visited on December 26, 2020).

[8] Leasing Process, Advantages, Disadvantages to Lessor and Lessee, available at: https://bbamantra.com/leasing-process-advantages-disadvantages/ (last visited on December 26, 2020).

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BY DEEPIKA DHAWANIYA | NATIONAL LAW UNIVERSITY, JODHPUR