The different types of Leases

A “lease” is defined as a contract between a lessor and a lessee for the hire of a specific asset for a specific period of payment of specified rentals.

The different types of leases are discussed below:

This type of lease which is for a long period provides for the use of asset during the primary lease period which devotes almost the entire life of the asset. The lessor assumes the role of a financier and hence services of repairs, maintenance etc., are not provided by him. The legal title is retained by the lessor who has no option to terminate the lease agreement.

The principal and interest of the lessor are recouped by him during the desired playback period in the form of lease rentals. The finance lease is also called capital lease is a loan in disguise. The lessor thus is typically a financial institution and does not render specialized service in connection with the asset.

  • Operating Lease:

It is where the asset is not wholly amortized during the non-cancellable period if any, of the lease and where the lessor does not rely on is profit on the rentals in the non-cancellable period. In this type of lease, the lessor who bears the cost of insurance, machinery, maintenance, repair costs, etc. is unable to realize the full cost of equipment and other incidental charges during the initial period of lease.

The lessee uses the asset for a specified time. The lessor bears the risk of obsolescence and incidental risks. Either party to the lease may termite the lease after giving due notice of the same since the asset may be leased out to other willing leases.

  • Sale and Lease-Back Leasing:

To raise funds a company may sell an asset which belongs to the lessor with whom the ownership vests from there on. Subsequently, the lessor leases the same asset to the company (the lessee) who uses it. The asset thus remains with the lessee with the change in title to the lessor thus enabling the company to procure the much-needed finance.

  • Sales Aid Lease:

Under this arrangement, the lessor agrees with the manufacturer to market his product through his leasing operations, in return for which the manufacturer agrees to pay him a commission.

  • Specialized Service Lease:

In this type of agreement, the lessor provides specialized personal services in addition to providing its users.

  • Small Ticket and Big Ticket Leases:

The lease of assets in smaller value is generally called as small ticket leases and larger value assets are called big ticket leases.

  • Cross Border Lease:

Lease across the national frontiers is called cross broker leasing. The recent development in economic liberalization, the cross-border leasing is gaining greater importance in areas like aviation, shipping and other costly assets which base likely to become absolute due to technological changes.