A lessee is a person or entity who acquires the right to use a property or asset owned by someone else. The parties involved enter into a lease agreement, which binds them to stick to the legal clauses associated with the deal. Unlike ownership, leasing a property allows the lessee to enjoy their right to use it against a security deposit and further periodic payments.
Table of contents
Purchasing a property or asset involves paying a huge amount at once, which an individual or entity might not be prepared for. However, a lessee gets a chance to use the property by not having to pay the full amount at once but rather pay the entire amount in equal proportions at regular intervals.
- A lessee is an individual or entity that acquires the right to use someone else’s property once the lease agreement is signed.
- Lessee, lessor, and a lease agreement are the main components of leasing a property, be it a premise, car, equipment, or machinery.
- As soon as they become users of the property, they are responsible for taking due care of the maintenance and health of the asset. In case of damage, they are the ones who need to get it repaired.
- A lease agreement is legally binding for both the lessees and lessors. In some cases, the tenants may also be asked to sign a lessee disclosure statement.
Lessee is a legal term for a tenant who must follow the clauses specified in the lease agreement. The agreement legally binds them to obey the terms to avoid eviction. This contract contains restrictions and guidelines that the property owner, also known as the lessorLessorA lessor is an individual or entity that leases out an asset such as land, house or machinery to another person or organization for a certain period., wants the lessee to abide by. The latter enjoys this right to use the property for an amount, which they do not have to pay in full altogether. Instead, they can divide the total amount into equal installments for monthly, quarterly, or annual payments.
Whether people leaseLeaseLeasing is an arrangement in which the asset's right is transferred to another person without transferring the ownership. In simple terms, it means giving the asset on hire or rent. The person who gives the asset is “Lessor,” the person who takes the asset on rent is “Lessee.” residential property, a car, or equipment, they become responsible for taking care of and maintaining the assets. Once the lease tenure gets over, the property will be returned to the original owner. If the property suffers any damage within the lease period, the person acquiring the right to use it during that tenure would have to get it repaired before handing it over to the owner when the term ends.
The period for which an asset is allowed to be used on lease depends on various factors, including the type and nature of the property. For example, if a person leases land for construction purposes, the tenure would be more as the process involved takes time. On the other hand, leasing a car might be for a limited period.
After the lease term, the lessor might renew the lease agreement with the same person or entity or look for someone else to enter into a new contract for the same property. In addition, they may introduce the asset in the market for sale or ask the lessee to own it based on the terms mutually agreed upon by both parties.
If tenants do not obey the lease terms or violate them, they will face negative repercussions. For example, the lessors might terminate the contract and ask them to evacuate the property before the lease tenure ends. Thus, the people allowed to use the lessor’s property must obey the lease agreement to avoid such legal actions.
The term lessee is incomplete until the entire context of leasing is understood. They are a part of a leasing deal for any property, including a vehicle, residential premise, equipment, etc. Besides them, there is a lease agreement and a lessor in leasing.
A lease agreement is a legal document that authorizes an individual or entity to use a property against a security deposit and a predetermined periodic payment. It contains all the terms and conditions that the owners want the lessees to consider. It can be classified as a capital leaseCapital LeaseA capital lease is a legal agreement of any business equipment or property equivalent or sale of an asset by one party (lesser) to another (lessee). The lesser agrees to transfer the ownership rights to the lessee once the lease period is completed, and it is generally non-cancellable and long-term in nature. (full control is transferred), operating lease (lessor retains and shoulders all responsibilities and enjoys all benefits), and sale and leaseback (one party buys the property from another and leases the same to the latter).
A lessor is a person who owns the property to be leased. The person is responsible for allowing or disallowing a person or entity to use the asset. During the lease agreement, the lessor retains the ownership of the property, and hence, they have the right to receive the decided periodic payments from the lessees/tenants.
A tenant, which a lessee is also known as, enjoys partial or complete rights on the property it leases from the lessor, whether residential or commercial.
In the case of commercial property, the person has the liberty to transform the space or equipment or other leased assets as per the business’s suitability. While leasing for a business purpose, it is significant to maintain accurate lease accounting records. The firms or organizations record the leasing activities to assess their impact on the accounting methods and financial reportingFinancial ReportingFinancial reporting is a systematic process of recording and representing a company’s financial data. The reports reflect a firm’s financial health and performance in a given period. Management, investors, shareholders, financiers, government, and regulatory agencies rely on financial reports for decision-making.. The balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company. for lessee accounting records the lease as an asset and a liability, given the risks they take by holding accountability for someone else’s property.
On the other hand, the residential spaces have room for limited lessee rights on the property. For example, they might decorate the property, but transforming the structure is hardly allowed. In short, it is up to the lessors as to what extent they limit the choices for the tenants. However, the tenants have the right to privacy and access to basic features and facilities, including electricity, water, etc.
Let us consider the following example to understand the roles and rights of leased property users:
Scenario 1: Signing the Lease Agreement
Wayne Manufacturers Pvt. Ltd wants to start a new production unit in the industrial area of South Dakota State. However, it can’t afford to purchase land and construct a factory premise. Thus, it plans to take an industrial space on lease to install the required machinery and begin production soon.
Wayne approaches ABC Rental Company for leasing a commercial space. It informs the former that Stark Industries has winded up the business, and is ready to lease their factory premises. Wayne connects with the potential lessor and cracks the deal. It signs a lease agreement for ten years with Stark for $12000 per month. As soon as Wayne signs the agreement, it becomes the lessee, gains possession, and gives Stark a periodical lease rent.
Scenario 2: Violation of the Agreement
However, Wayne conducted illegal activities on the lessor’s property during the term. When Stark comes to know of it, it cancels the contract and orders evacuation of the property at the earliest. This is due to its right to take necessary actions under the law for the leased property.
Lessee vs Lessor
Both of them are the primary participants in leasing, be it a residential property or commercial asset. While a lessor owns a property, a lessee is the one who acquires it under a legal contract. The former transfers the right to use an asset to someone else only when it is not in use currently.
The lessors ask for a security deposit and agree to receive the payment for the property in periodic installments. On the other hand, the lessee can use an asset or equipment for a specific period without having to pay a lump sum for it. Instead, they can divide the full amount into equal proportions throughout the lease period.
During the lease period, the users have to keep the leased property well-maintained. It is to make sure the asset remains in a sound condition when they return it to the original owners. In addition, the users must take care of any damage or issue related to the assets during the lease period.
Frequently Asked Questions (FAQs)
They are people (or parties) who, under a contractual agreement, rent land or property (usually immovable property) from a lessor (owner of the property), and the arrangement between the two, when entered into a lease agreement, becomes a legal contract. In addition, it is a more economical option than purchasing an asset that requires high capital investment.
They can sublease a property if the owner agrees to it. Subleasing occurs when the original lessee enters into a legal contract to transfer the right to use an asset to a third party. However, subleasing might not be permitted in all parts of the world. Thus, the tenants must know if their region allows subleasing.
Lessee is the legal term, while a tenant is a more common term used, especially in the context of a real estate property.
This article is a guide to Lessee and its meaning. Here we explain the definition of lessee accounting along with its rights, related components, and examples. You can learn more from the following articles –