Introduction to Lessee
A Lessee is a party who uses the asset under a lease agreement, which can either be written or verbal. The agreement grants the right to use the asset to the lessee, a mutually agreed onetime payment or monthly payments (rent) to the owner of the asset, for the specified period of time.
It is the person who rents the asset from its owner. The lease agreement is a binding agreement on the lessee and the lessor.
A leased asset can be any asset like land, vehicle, machinery etc. For Example; K ltd enters into an agreement to lease a machine to T ltd for a rental of $5,000 per month for 3 years. Here, K ltd is lessor, L Ltd is lessee, Machine is a leased asset, and $5,000 is lease rent.
Roles of Lessee
Role of this in a lease agreement depends upon the types of the lease agreement. There are basically two types of lease agreements; Finance lease and operating lease.
1. Finance Lease
- A finance lease means a lease where Risk and Rewards incidental to ownership are also transferred to the user.
- Under a finance lease, it is presumed that the lessor has transferred the risks and rewards of ownership to the lessee. Accordingly, it is presumed that the asset is transferred from the books of the lessor to the books of a lessee, even though the title does or may not pass eventually.
- It is considered that the lessee buys the asset on credit and pays for the asset on instalments. Since the payment of the asset comes in installments, the payment would include component of interest and principal.
- Also, the depreciation on the asset is claimed by the lessee.
2. Operating Lease
- An operating lease means lease other than financial lease. The duration of the operating lease is much less as compared to the useful life of the asset and also the risks and rewards pertaining to the ownership of the asset are retained by the owner of the asset.
- Lease rent paid by the lessee is considered as income of the lessor and expense of the lessee.
Example Of Lessee
K Ltd. takes a bulldozer on lease from T Ltd. for constructing a bridge. The construction would take 3 years to complete and a bulldozer is used for these 3 years completely. K ltd pays a rental of $500,000 per month.
Lessee – K Ltd, Lessor – T Ltd, Lease rent – $500,000 per month, Lease term – 3 Years.
Lessee Versus Lessor
Below are the major difference :
|A lessor is the owner of the asset||A lessee is a user of the asset|
|Lessor receives rent from the lessee in exchange of an asset given on lease||A Lessee pays rent to the Lessor in exchange of the usage of an asset taken on lease.|
|Title of the asset remains with the lessor||Lessee only uses the asset without having any ownership of the asset|
|Rent received from the lessee is an income of the lessor||Rent paid by the lessee is its expense|
|Cost of repairs and maintenance of the asset is lessor’s responsibility||Lessee is not responsible for the repairs and maintenance of the asset unless otherwise stated in the agreement|
The following are a few advantages are:
- Saves Big Capital Investment: Leasing an asset saves the lessee on spending a big amount to purchase the same asset. Hence, when the business is new with less capital, this is a more economical option.
- 100% Financing: In most of thelease agreements, there is no upfront fee required to be made like it is in the case of loan financing of the asset where a certain amount of down payment is required to be made. Only the monthly lease rent payments are to be done.
- No Risk of Obsolescence: if the asset becomes obsolete due to change in technology or any other reason, there is any risk for this.
- Tax Benefits:Lease rentals are shown as an expense in the books of the lessee. Hence, reduces the overall income and taxes of these.
- Flexibility: The parties to the lease can make or amend the rules of the lease agreement as per their convenience. For example; during the initial days of the project, the cash inflow of the lessee is restricted. So lessor and the lessee agree to have minimum rent during initial months and maximum towards the end of the lease period.
The following are the few disadvantages are:
- Higher Lease Charges: Sometimes, the lessor also includes the cost of obsolesce in the lease rentals which results in the higher lease payments than loan financing.
- It has no right to make any alterations or improvements in the leased asset without the consent of the lessor.
- In case of early termination of the lease agreement, the lessee has to bear the penalties for the same.
- It has no right in any appreciation in the value of the leased property at the end of the lease term.
It is a part of a lease agreement where the owner (lessor) of the asset authorizes the other party (lessee) to use the asset for a specified period of time against some mutually agreed payments. A lease can be a finance lease or an operating lease depending upon the nature of the agreement.
This is a guide to Lessee. Here we also discuss the introduction and Roles of Lessee along with advantages and disadvantages. You may also have a look at the following articles to learn more –