Lessor vs. LesseeComparison and Differences

Lisa Borga

What is Lessor vs. Lessee?

In any lease agreement, there are two primary parties, the lessor and the lessee, and it is important to understand the difference between the two.

A lease agreement provides for a lessee to receive the usage of an asset or property in return for making regular payments to a lessor who owns the asset or property being used.

In many cases, a leasing agreement is a far more economical option for the lessee due to its lower initial cash outlay.

For the lessor, it allows them to retain ownership of the property while earning a return on the investment of capital.

lessor vs lessee

The Roles of a Lessor and Lessee

A lease agreement holds two primary parties the lessor and the lessee.

Lessor

The lessor is an asset or property’s legal owner that gives another person or entity the right to occupy or use this property for a fixed period.

Throughout the course of the leasing agreement, the lessor still possesses all ownership rights to the property and will receive regular payments from the lessee based on the leasing agreement.

This agreement may also provide rules for the use of the asset or property, and the lessor is entitled to compensation for misuse or damage.

The lessor must give permission for the asset to be sold, and in such a case, the lessor is entitled to any financial proceeds that result from the sale.

Though the lessor still possesses full ownership of the property or asset, they will lose significant rights to the property during the course of the leasing agreement.

The lessor will enjoy only limited access to the asset and only with the lessee’s permission.

The lessee will need to receive notice prior to any maintenance to be performed on the asset or property before the actual time of the service.

However, should the lessee damage the asset or property or use it in the performance of a criminal act, the lessor possesses the right to end the lease and or evict the lessee without prior notice.

Upon the expiration of the leasing agreement, as well as if other conditions cause the agreement to end prior to such state, the property or asset will be returned to the lessor.

In some cases, though, the contract may provide for an option to purchase the property or asset upon closing the contract.

Lessee

The lessee in a leasing agreement is the party that receives the right to use a property or asset for a set period of time in return for regular payments based upon the terms of the agreement.

Generally, the length of the leasing period will be at least in part based upon the type of property in question.

For example, the lease of property such as for a home or commercial property will often be for a significantly longer period than the lease for an automobile.

Throughout the leasing period, the lessee will be responsible for the care and any necessary maintenance of the asset or property.

The asset or property may not be significantly altered without the lessor’s permission, and the lessee must make repairs or replacements for any significant damages prior to the expiration of the contract.

Should the lessee fail to do this, the lessor may charge the lessee for the cost of the repairs per the terms of the leasing agreement.

lessor vs lessee

Lessor vs. Lessee Agreement

Lease agreements are contracts that outline the terms that a lessee agrees to in order to rent a property or an asset from a lessor.

It includes any legal obligations the lessee will have when using the asset.

The lessee and lessor must both sign the agreement and be bound by its terms.

Should either party violate the terms of the lease, it may be terminated.

An example of this would be if an individual leased an automobile and proceeded to use it in the performance of criminal activities, the lessor has the right to immediately terminate the lease and take possession of the vehicle.

Different Kinds of Lease Agreements

lease agreements

Here are three kinds of lease agreements and how they work.

Capital Lease

In a capital lease, the lessee gains ownership of the asset which gives them full control over the asset.

This makes the lessee responsible for any costs related to owning the asset, including maintenance costs.

In order to comply with GAAP, a capital lease must appear on the balance sheet of the lessee.

It needs to be recorded in the asset section of the balance sheet, and a corresponding liability needs to be recorded as well.

Interest on the lease needs to be recorded on the income statement.

Capital leases are long-term leases and take up most of the useful life of an asset.

During this lease, the lessee is entitled to all of the benefits of the asset but also assumes any risks associated with the asset.

Operating Lease

An operating lease allows a lessee to use an asset for part of the asset’s life without being responsible for maintenance of the asset.

Also, the payments on the lease will be expensed on the income statement, and the asset will not appear on the balance sheet as a capital lease does.

The lessor will still own the asset and be responsible for the asset and retain any of the benefits of owning the asset.

Sale and Leaseback

A sale and leaseback is a transaction where the seller sells an asset to a buyer only to immediately lease it back from the buyer.

Then, the seller is the lessee, and the buyer is the lessor.

In this type of agreement, there is an understanding before the sale occurs that the buyer will immediately lease the asset at an agreed-on payment and for a certain period of time.

The buyer in this situation could be an insurance company, an institutional investor, a leasing company, or a finance company.

FundsNet requires Contributors, Writers and Authors to use Primary Sources to source and cite their work. These Sources include White Papers, Government Information & Data, Original Reporting and Interviews from Industry Experts. Reputable Publishers are also sourced and cited where appropriate. Learn more about the standards we follow in producing Accurate, Unbiased and Researched Content in our editorial policy.

  1. University of Rhode Island "Sample Lease Agreement" PDF. November 29, 2021

  2. Sam Houston State University "Landlord- Tenant Relationships" Page 1 . November 29, 2021

  3. University of Texas " UTS 142.3 Policy on Capital Leases vs. Operating Leases for Lessees" Page 1 . November 29, 2021