Legal terms can be confusing and ambiguous. For example, understanding lessor vs. lessee can be a challenge when talking about lease management. The terms sound similar and can be mistakenly interchanged, causing complications.
Through this blog, you will be able to understand the meaning of lessor and lessee and tell the difference between the two entities as far as leases and lease management is concerned.
Let's begin with understanding who a lessee and a lessor are.
What is a Lessee?
In a lease agreement, a lessee is an entity that is given the rights of use of the property or equipment for the time period mentioned in the agreement.
For the term mentioned in the lease agreement, the possession of the asset transfers to the lessee. The term depends on the nature of the asset.
For example, for a manufacturing facility, the land lease would be for a longer term as compared to an apartment rental lease.
What is a Lessor?
The person who has legal ownership of an asset or a property is called the lessor. It is the lessor’s responsibility to draw up a lease agreement based on mutual discussions with the entities involved and execute a lease.
Since the lessor is the owner of the property (or asset), all the taxation, maintenance, and accountancy liabilities are their responsibility.
What’s the Difference Between a Lessee and a Lessor?
The major difference between a lessor and a lessee is their position in a lease. While the lessor is the one that holds the rights to a property/asset, the lessee borrows the right of use of the property/asset for a certain period of time.
Tabulated below are other significant points of difference between a lessor and a lessee.
||The lessor is the owner of the property or asset in question. They draw up the lease document to let others use the property for the set term.
||The lessee is the person who assumes possession of the asset in question for the term set out in the lease. In simpler terms, a lessee is the “renter,” “tenant,” or the “borrower” of a property.
||For the asset in question (like an apartment or a piece of equipment), the ownership stays with the lessor, even if the property has been rented out
||According to the terms and conditions specified in the lease, the possession and usage rights of the asset temporarily rest with the lessee. They still do not own the asset.
||The lessor owns the asset in full legal terms. The asset is under their legal name. The taxation, depreciation, etc., on the asset is under the owner’s accounts.
||The lessee does not own the asset. They merely have the right to use it for a certain period of time, as mentioned in the lease document.
||In exchange for letting the lessee use the property or equipment, the lessor receives the promised sum of money as mentioned in the lease.
||In exchange for getting to peruse the property or equipment, the lessee agrees to pay the lease amount in full according to the payment terms mentioned in the lease.
|Bankruptcy conditions / Clause
||In case the lessee files for bankruptcy and is unable to pay the lease amount, then after all the legal procedures, the lessor has the right to first payment.
||Since the lessee is only the temporary possessor of the property or the equipment in the lease, they are not connected in any legal way to a lessor’s bankruptcy.
|Possession of the Asset
||The lessor typically does not possess the asset. They do, however, hold the ownership of the asset.
||The possession of the asset in question lies with the lessee. This is because they are the ones using it according to lease conditions.
||Since the lessor has ownership of the property or asset, any profits or income made from the lease of this asset is liable for taxation.
||The lessee is not liable to pay for any taxes that gather on the asset since the ownership of the asset does not lie with the lessee.
|Restrictions and limitations
||There are no limitations or restrictions on asset use for the lessor since the ownership rests with them. However, when the asset is leased, permission to modify or use the asset may be required from the lessee.
||The lessee has to peruse the asset according to the terms and conditions mentioned in the lease. They are not the owners; therefore, they must comply with the lessor’s lease agreement.
|Wear, tear, and repair of the Asset
||In most cases, it is the responsibility of the lessor to maintain the asset and cover its repair costs.
||For certain types of assets, the lessee may be required to return the asset in the same condition as received upon lease commencement.
|Utility costs and charges
||When the property is yet unleased, it falls upon the lessor to cover the utility charges.
||When the property is in use by the lessee, they must pay the utility charges either to the landlord or directly to authorities, as mentioned in the lease.
|Lease termination clause
||In case there is a breach in the terms and conditions of the lease as laid out by the lessor, they can terminate the lease at any time.
||Where the cause of the termination is not under the lessee’s control (like natural calamities), they can terminate the contract.
Summing up, a lessor is the owner of the asset, whereas a lessee is a person who gets possession of an asset for temporary use.
By denominating these terms for the owner and the renter, lease management becomes simpler. The owners and renters become clearly discernible in the lease agreement.
On that note, employing lease management software at your enterprise would save you from having to juggle these terms on a daily basis. The software can be automated to manage every lease your organization has and monitor the lessor and lessee’s compliance.
Lease management does involve understanding all the legal terms that are used in this ecosystem. However, it doesn't have to be difficult. With the information in this blog, the difference between lessor vs. lessee is clear, among other things.
Using the advanced technology of no-code software development has propelled organizations one step further in developing custom lease management solutions. Platforms like LeasO provide robust no-code software that brings lease accounting, Lease administration and Lease management all under one easy to use interface.
For more information on no-code software, you can get in touch with us.