A lease is an agreement between two people where the owner of the asset allows the other person to use the asset in lieu of some regular timely payment usually referred to as Rental payments. The owner of the asset is known as ‘lessor’ i.e. who provide the asset on lease and the person who takes the asset on lease is known as ‘lessee’. Every lease has some conditions. The lessor may also provide some conditions to be followed by the lessee for the use of the asset and the lessee needs to abide by those rules or it will result in the revocation of the deed.
A leasing agreement is usually confused with the rental Agreement whereas a rental agreement is different from the leasing agreement. A rental agreement is concerned with the tangible property such as goods, buildings, machinery etc. only whereas a leasing agreement covers both tangible and intangible goods such as buildings, patents, copyrights etc.
A lease is a legal contract which means it is enforceable at law. In Countries like US, the agreement is used as a means to prove the possessory rights of the person over the asset. It is said to be a hybrid kind of document as it contains the qualities of a deed too.
The common items to be stated in a Leasing Agreement are:
The cancelable lease refers to the lease that can be cancelled by the lessee at any time without any penalty. The leases are generally non-cancelable once entered into. Not all the leases are non-cancelable. There could be an agreement between the lessor and the lessee regarding the cancellation provisions of the lease. It mainly depends upon their mutual consent over the issue.
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1. Property Lease: Any of the personal assets can be given on lease. Therefore, property can also be given on lease to other people. In case of property i.e. a real estate; the leasing is known as rental agreement. This renting agreement is just a narrow term of leasing which is associated with the property only. There can be various terms and conditions associated with the rental agreement such as maintenance, no pets, abstinence about the outsider staying in for the night etc. The person has to abide by all the rules.
2. Equipment Leasing: Equipment leasing is associated with the industries where the equipment or tools are required for the proper working and to carry out the functions. Many industries follow this method. In equipment leasing the industries take the equipment on lease for the use or purchase. The kind of equipment leased can be mining and machining equipment, vessels and containers, road building tools, off-site tools, aircrafts, IT software, transport equipment etc. This is generally done by the banks and big financial institutions.
3. Finance lease: A finance is just like a hire purchase system. But the hire purchaser here is the bank or the financial institution and it is not the business of the hire purchaser. It buys the asset and leases it out to the lessee. He does not become the owner of the asset but uses the asset for his benefit, possesses it and pay the interest on amount to the lessor. The lessee not only utilizes the asset but maintains it as well and he has a substantial and economic interest in the asset.
The finance lease function works in the following manner:
4. Sub-lease: Sub-leasing refers to the situation when a lessee gives the asset on lease to a third person such that the third person becomes the lessee and the original lessee become the lessor for the new lessee. In broader words, when a person takes an asset on lease and he gives that asset on lease further; that is known as sub-lease where the new person taking the asset will be known as lessee and the intermediator will be called sub-lessor. For e.g. a person took a flat on lease. He finds that a portion of the flat is vacant and thus he accommodates a person in that area and recovers rent from him. This will be a case of sub- lease where the lessee leases the asset further.
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1. Deposit: The deposit or also known as the security amount is deposited by the tenant to the lessor. This deposit amount initially is the lessee’s and is given to lessor for acquiring some of the rights like right for acquiring the asset, secure a low rent etc. Such kind of deposit remains with the lessor until the lessee is in the possession of the asset. This deposit is returned only after making the deductions for any loss or damage done to the premises or the asset. General depreciation or wear and tear does not account for the loss. Any loss or damage already sustaining in the asset must be reported beforehand.
2. Insurance: Sometimes for leasing the asset there is a requirement for the lessee to first get insured against specific covers. This acts as a cover if any accident occurs while using the asset, the lessee will be insured against it and it will help in mitigation of the loss. The insurance is used as a proof to set the lease deed or agreement. The general covers required are:
A lease deed is a legal document which can be enforced at law by the parties to sue each other or sue the third party to the contract. The lease deed is an essential document which tries to reduce the cases of frauds.
Term of deed: The term of the agreement needs to be defined. The tenure should be written in the deed. IT will be either for a fixed period of time or it will be a periodic lease which needs to be renewed from time to time or it will be a lease for an unlimited duration.
Transparency and fine print: This means that the lessor must maintain the transparency of the lease agreement. All the facts and descriptions must be clearly stated and all the necessary things should be disclosed. If the facts are not revealed; the agreement will be vague.
Rent: Rent is the regular installment that needs to be paid. The amount of the rent must be stated and the timely increase in the rent must be consented upon by both the parties to the agreement.
Exclusive Possession: The possession needs to be unqualified i.e. without conditions. The qualified possession will amount to the rendering of the agreement inefficient and thus will be discarded. Thus the possession of the leased asset must be given properly and exclusively.
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