a lease may be defined as a contractual arrangement in which a
party owning an asset / equipment offers the asset for use to
another for a certain period in exchange for periodic payments
with or without premium. At the end of the period of contract,
the asset regresses to the lessor, if there is no provision for
the renewal of the contract. Leasing essentially involves the
divorce of ownership from the economic use of an asset / equipment.
is a device of money lending. The position of a lessee is akin
to that of a person who owns the same asset with borrowed money.
The real function of a lessor is not renting of asset but lending
of funds and lease financing is, in effect, a contract of lending
money. The lessor is an ostensible owner of the asset because
the possession and economic use of the equipment vests with the
lessee. The lessee is free to choose the asset according to his
requirements. The lessor does not resort to the equipment as long
as the rentals are regularly paid to him.
essential elements of lease financing are:
to the Contract
are essentially two parties to a contract of lease financing,
viz. the owner and the user. They are known as the lessor and
the lessee respectively. Lessor as well as lessee may be individuals,
partnerships, joint stock companies, corporations or financial
institutions. Sometimes, there may be joint lessor or joint lessee,
particularly where the properties or the amount of finance involved
is enormous. Besides, there may be a lease-broker, who acts as
an intermediary in arranging lease deals. Merchant banking divisions
of foreign banks in India, subsidiaries of some Indian banks,
and a few private merchant bankers are acting as lease-brokers.
Besides, a lease contract may involve a lease financier, who refinances
the lessor, either by providing term loans or by subscribing to
equity or under a specific refinance scheme.
asset or equipment to be leased is the main theme of a contract
of lease financing. The asset may be an automobile, plant and
machinery, equipment, land and building, factory, a running business,
aircraft, and so on. The asset, must, however, be of the lessee's
choice suitable for his business needs.
separated from User
essence of a lease-financing contract is that during the lease-tenure,
ownership of the asset vests with the lesser and its use is allowed
to the lessee. On the termination of the period of the lease,
the asset reverts to the lessor.
term of lease is the period for which the agreement remains in
force. Every lease should have a definite period; otherwise, it
will be legally inoperative. The lease period may continue the
entire economic life of an asset. The lease may be perpetual in
payment that the lessee reimburses to the lessor for the lease
transaction is known as
the lease rental. The lease rentals are so structured as to compensate
the lessor for the investment made in the asset (in the form of
depreciation), the interest on the investment, repairs / insurance
if any borne by the lessor, and servicing charges over the lease
of Termination Lease
the termination of the contract, various modes are available:
.The lease is
renewed either on a perpetual basis or for a specific period.
.The asset reverts
to the lessor.
.The asset reverts
to the lessor and the lessor sells it to a third party.
vends the asset to the lessee.
may mutually agree to and choose any of the previously mentioned
alternatives at the beginning of the lease contract.
lease transaction differs on the basis of the following parameters:
risks and rewards or ownership
.Number of parties
to the transactions
the equipment manufacturer, the lessor and the lessee
the basis of these variations, leasing can be classified into
the following types:
.Sale & lease
a finance lease, the lessor transfers to the lessee substantially
all risks and rewards incidental to the ownership of the asset
whether or not the title is eventually transferred. It involves
payment of rentals over an obligatory non-cancelable lease period,
sufficient in total to amortize the capital outlay of the lessor
and leave some profit. That's why, such leases are also known
as 'full payout leases'. Finance lease is generally used for ships,
aircrafts, lands, buildings, heavy machinery, etc.
an operating lease, the lessor does not transfer all risks and
rewards incidental to the ownership of the asset and the cost
of the asset is not fully amortized during the primary lease period.
The lessor provides services attached to the leased asset, such
as maintenance, repair and technical advice. Hence, operating
lease is also known as 'service lease'. Operating lease is generally
used for computers, office equipments, automobiles, trucks, telephones,
& LEASE BACK
is an indirect form of leasing. The owner sells his equipment
to a leasing company that leases it back to the owner.
direct lease, the lessee and the owner of the equipment are two
different entities. A direct lease can be of two types: Bipartite
and Tripartite Lease.
are two parties to the lease transaction, namely the lessor and
the lessee. The leasing company funds the entire investment by
an appropriate mix of debt and equity funds. The debts raised
by the leasing company to finance the asset are without recourse
to the lessee.
are three parties to the transaction: (1) lessor, (2) lender and
(3) lessee. In such a lease, the leasing company buys the asset
through substantial borrowing with full recourse to the lessee
and without any recourse to itself. The lender obtains an assignment
of the lease and the rentals to be paid by the lessee are a first
mortgaged asset on the leased asset.
lease transaction is classified as domestic if all parties to
the agreement are domiciled in the same country.
the parties to the lease transaction are domiciled in different
countries, it is known as international lease. This type of lease
is further subdivided into import lease and cross-border lease.
In an import lease, the lessor and the lessee are domiciled in
the same country but the equipment supplier is located in a different
country. When the lessor and the lessee reside in different countries,
the lease is known as cross-border lease. The domicile of the
supplier is immaterial.
financing offers the following benefits to the lessee:
of Capital Goods
Source of Finance
in Structuring of Rentals
lessor has the following advantages:
Financing has following drawbacks:
on Use of Equipment
of Finance Lease
.Loss of Residual
of Lessee's Asset
Loans No Fax