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What are the types of Lease?
Financial, Operating and Conveyance type leases
Leveraged and non-leveraged leases
Sale and leaseback
Full-payout and non-payout leases
Specialized service lease
Net and Net-net leases
Sales-Aid lease and vendor lease
Small-ticket and big-ticket leases
Cross-border lease
Consumer leasing
About Leasing

Lease and Rental are used interchangeably in this FAQ

What is a Lease?

The Transfer of Property Act defines a lease as a transaction in which a party owning the asset provides the asset for use over a certain period of time to another for consideration in the form of periodic rent.

Lease may also be defined as a contract between two parties for the hire of a specific asset wherein the lessor retains ownership of the asset while the lessee has possession and use of the asset on payment of specified rentals over a period of time.

Leasing is suitable for financing most investments in productive equipment and is available to a broad range of business and other organizations, such as hospitals, educational institutions, associations and government agencies.

How is a Lease different from a Hire Purchase (HP)?

The economic substance of a lease is similar to that of a HP. A lease is a simple contract of bailment while a hire-purchase has an additional element - an option to buy. There are, however, some differences that affect the choice between a lease and a HP

Tax consequences:
The depreciation rate does not have any impact on the post tax returns in the case of a HP whereas a lease would be directly affected by it. Higher the depreciation rate, higher the post tax rate of returns. Therefore a lease arrangement becomes advisable for items of higher depreciation.

Repayment Period:
Leasing is preferred for periods of 6 years or more while Hire Purchases are undertaken for shorter periods of time. .

How is a Lease different from a Sale?

As per the Sale of Goods Act, a "sale" means a transfer of property in goods. A lease, on the other hand, is merely a transfer of the right to use the goods and is therefore not a sale. .

What are the types of Lease?

Financial, Operating and Conveyance type leases
Leveraged and non-leveraged leases
Sale and leaseback
Full-payout and non-payout leases
Specialized service lease
Net and Net-net leases
Sales-Aid lease and vendor lease
Small-ticket and big-ticket leases
Cross-border lease
Consumer leasing

What is a Financial Lease?

A lease wherein the user can acquire the use of the asset for most of its useful life and pay rentals to the lessor, is called a financial lease. The user will be responsible for maintenance of the equipment and the payment of taxes and insurance.

What is an Operating Lease?

Operating lease is a contract between the lessor and lessee such that the cost of the asset is not fully recovered from a single lessee. This means that the period of the lease will be shorter since the lessor will recover the cost of the asset from multiple lessees. Repair and maintenance of the asset is the lessor's responsibility.

What are the differences between a Financial Lease and an Operating Lease?

A finance lease also called a capital lease, is only an exchange of money for money and does not result in the creation of economic services. An operating lease, on the other hand, is basically an economic service.

A lessor under a finance lease is the legal owner of the asset but does not bear any of the risks of rewards of ownership while a lessor under an operating lease carries all the benefits of ownership like the depreciation benefits.

The International Accounting Standard No. 17 has defined a finance lease as "a lease that transfers substantially all the risks and rewards incident to ownership of an asset. Title may or may not eventually be transferred". Operating lease has simply been defined as a lease other than a finance lease.

What is a Sub-lease?

A transaction in which the lease property is re-leased by the original lessee to a third party and the lease agreement between the two original parties remains the same (Back to top)

What are the rights and obligations of a lessee in a lease contract?

To use the asset during the lease period according to the terms of the lease agreement.
To use, operate, maintain and store the equipment properly.
To pay the lease rentals periodically as specified in the lease agreement.
To keep the asset insured at all times Lessor for an amount equal to the full insurable value of the asset.
To return the leased asset to the lessor upon the expiration or earlier termination of this Lease Agreement, i.e., in the event of default by the lessee

What is a foreclosure?

A foreclosure is the termination of the lease period by the lessor on request of the lessee prior to the end of the lease period

What is a Sale and Leaseback transaction?

Sale and Leaseback is a transaction where the lessee already owns the asset he wants to leverage. The lessee sells the asset to the lessor who pays for the asset and immediately leases it back to the lessee. This transaction will provide immediate non-fund based finance to the selling company and brings down the D/E ratio

What is a Sale and Leaseback transaction?

Sale and Leaseback is a transaction where the lessee already owns the asset he wants to leverage. The lessee sells the asset to the lessor who pays for the asset and immediately leases it back to the lessee. This transaction will provide immediate non-fund based finance to the selling company and brings down the D/E ratio

What is LMF?

A Lease Management Fee is an up front, non-refundable fee payable to the Leasing Company for services rendered like processing / marketing etc.

What is Residual value?

The value of the equipment at the conclusion of the lease term is called the residual value. It is the value at which the assets are transferred from the lessor to the lessee

What is a Structured Lease?

Structured rentals are not flat or equated over the lease term i.e. the rentals vary over the lease term. The rental structure should typically fit the lessee's inflows from the asset. A structured lease will have some visible pattern. The three main types of structured leases are as follows:

Stepped-up Rentals:
The rentals are structured so that the lessee will pay smaller rental amounts at the beginning of the lease period and larger rental amounts towards the end of the lease period i.e. the rentals will increase in proportion over the rental period so that the rentals are heavier towards the end of the lease period.

Stepped-down Rentals:
The rentals are structured so that the lessee will pay larger rental amounts at the beginning of the lease period and lower rental amounts towards the end of the lease period i.e. the rentals will increase in proportion over the rental period so that the rentals are heavier at the beginning of the lease period.

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