What is Operating Lease? Definition of Operating Lease, Operating Lease Meaning

What is Operating Lease? Definition of Operating Lease, Operating Lease Meaning


If the lessee violates any terms of the agreement, the lease agreement is considered void. The lease agreement guarantees the rights and obligations as between the lessor and lessee. Either party to the agreement can sue each other for non-performance of any terms and conditions of the agreement. The agreement also specifies the notice period for vacating the leased property. For example, a company may lease a printer for its office on an operating lease. But the lessee has the right to use it for a specified period, such as three years.

One of the biggest disadvantages of leasing is the long-term commitment. When you sign a lease, you agree to make regular payments for a set length of time. This lack of flexibility can be a disadvantage for people who desire more freedom to modify their assets. Disadvantages of leasing include a long-term commitment, no ownership rights, higher costs over time, and penalties for early termination.

But in case of an operating lease, the lessor will bear the operating, i.e., maintenance cost. In the financial lease, the lessor will pay full payout, whereas, in an operating lease, the lessor will not pay any payout, because the lessor will release the same asset to other interested candidates. Another difference is related to the cancellation of risk; the financial lease is not cancellable by either party.

Although the collection of 12 New Yorker articles has been out of print since 1971. IN WITNESS WHEREOF, the Lessor has set its hand unto these presents and a duplicate hereof and the Lessee has caused its common seal to be affixed hereunder and a duplicate hereof on the day, month and year first hereinabove written. To carry minor repairs in the demised premises not exceeding 9 the extent of Rs. 10,000 per year. To pay the electricity bills for the electricity consumed for lighting the demised premises and for operation of Air Conditioners, Fans, Computers and electrical appliances in the demised premises.

Sales Aid Lease

Operating lease is an agreement which gives the right to use assets, but does not give the right of ownership of an asset. Leased assets and liabilities related to leased assets are not included in the company’s balance sheet; therefore, operating lease is considered as off-balance sheet financing. Examples of such assets are aircraft, real estate, vehicles, or any heavy machinery. So basically a lease agreement is an agreement between a tenant, herein lessee and a landlord, herein lessor. The lease agreement has all the terms and conditions, party details, financial details, etc. defined clearly.

Basically, the contract outlines the terms and conditions under which the lessee can use the asset. As well as the responsibilities of both parties during the lease term. After the end of the operating lease, ownership remains with the lessor, but the lessee can return the assets or renew the lease or lessee may purchase the leased asset. The Lessor transfers the rights of the immovable property for a long period of time and works on the property. The Lessee takes charge of all the burdens and liabilities of the property.

Prevent the lessee from constructing any permanent structure on the leased premises. Right to recover the amount of damages from the lessee in case of any material damage to the property. But, the lessor, who wants to invest his money efficiently, becomes the financier for the lessee and earns the interest. Leasing also provides a lot of flexibility in that the equipment can be replaced at the end of the lease with updated equipment. That the issue of the matter of the lease should be permanent property, in the sense that the topic of the matter from which the issue raised should be of permanent property. Of the Transfer of Property Act, 1882 is applicable which explains certain situations and prescribes the duration of the lease.

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Lease is a contractual relationship between the Lessor and the Lessee therefore, the essential elements of a valid contract are necessary to be fulfilled and the parties should be competent to the contract according to the Indian Contract Act, 1872. When both the lessor and lessee mutually agree to end the contract. Duty to disclose material facts- The lessee is bound to inform the lessor of any material fact which the lessee is aware of and the lessor is not. In case the lessee does not disclose such fact and the lessor suffers any loss then the lessee is bound to compensate the lessor. A lease is transferable and heritable whereas a license is non-transferable and it is based purely on personal privilege. Subject matter- The subject matter of the lease must be immovable property like a flat, house or loft.

This is especially true if the lessee and lessor meaning agreement pertains to commercial and industrial spaces. In this article, we explain the difference between a lessee and a lessor, and their respective rights concerning a lease. A person who legally acquires the right to rent a property from a landlord is known as a lessee. Overall rate of return is the rate of return on the capital invested to purchase a real estate property.

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After experiencing the market, firms may purchase the asset. When companies want to replace their assets, they opt for operating lease, especially when the industry is changing. Capitalization rate, commonly known as cap rate, is a rate that helps in evaluating a real estate investment. Rights and liabilities of lessor and lessee are given in Chapter 5 Transfer of Property Act, 1882. If the lessor’s interest in the property is to terminate the lease on the happening of some event and when the event happens the lease is terminated. A lease is terminated after the expiry of the specified time period.

Rights and liabilities of a lessee

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As we discussed it with the explanation in detail with provision, this is to be noted that the role of lessor and lessee are important factor of the concept of lease. Many organizations approach this type of lease for better financial terms, or they don’t have that much financial aid, and in case companies want to replace their assets. In an operating lease, the lessee has unlimited access to the leased asset, but it only has to keep it in better condition. An operating lease is a lease that allows the borrowing party to keep its leased asset out of its accounting balance sheet, and pay rent on it.

That every right is followed by some liabilities and restrictions for the one enjoying the benefit out of it. On this context the rights and liabilities has been delivered to the rentee and the owner of the land which are given to them by the provisions of law that is TPA. That a rent agreement for a permanent property will be produced for the term of 11m. If the period goes beyond a year that is 12m, or further then a lease contract can only be produced by a listed instrument as according to S.107 of the TPA. In the books of the lessee, lease payments are recognized as an expense item in the Profit and Loss statement. A contract of Lease can be made only for immovable property or assets.

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The lessee pays a monthly rental payment to the lessor, and the lessor. Both is responsible for any repairs or maintenance needed during the lease term. Leasing is a contract between a lessor and a lessee for the hire of a specific asset for a specific period by payment of specified rentals. The maximum period of lease according to law is for 99 years. Previously land or real estate, mines and quarries were taken on lease. But now a day’s plant and equipment, electronic equipment, civil aircraft and ships are taken on lease.

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According to Section 106, if a lease agreement is made for agriculture and manufacturing purposes without specifying the duration of the contract then it is prescribed to be for a year and notice for termination of the lease is given in 6 months. The notice made should be written and sent by post or personally delivered to another party and duly signed by them. The notice made should be affixed without hiding it from the other party. A lessor and a lessee are terms used in the context of a lease agreement, which is a contractual arrangement where a property owner allows another party to use their property in exchange for rent. For the duration of the lease period, the lessee is responsible for taking care of the asset and conducting regular maintenance as necessary. If the subject of the lease is an apartment, the lessee must not make any structural changes without the permission of the lessor.

The lease made will be for the working and use of the immovable property and the Lessor and Lessee exchange the rights of the property through the contract of lease. Death of either party i.e. lessor and lessee does not affect a lease, whereas a licence is terminated in such situations. In case there is neither an oral confirmation or a registered document of a lease agreement accompanied by delivery of possession then there is no formation of a lessor and lessee relationship. A lessee gets the right to use the property of the landlord in exchange for monthly rent and a security deposit. The rights and responsibilities of lessees are defined in state laws on rental property.

A lease agreement may be for a residential property or a commercial property. In the case of commercial properties, the lease agreements can contain complex terms and conditions. A commercial lease can be for the use of the premises with furniture and fittings. There may be other conditions for the use of the property, including sub-letting to another party. Lease agreements are legal documents and bind on the lessor and the lessee. The lease agreement sets forth the terms and conditions on the lease.

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The lessor or his agent are allowed to inspect the property at the reasonable ground. Only the changes caused by irresistible forces can act as an exception for this liability. Right to have benefits of crops- When the lease is of uncertain duration then, in that case, the lessee or his/her legal representative has been given the right to gain benefits from all the crops grown by them. So basically a lessor shall disclose any apparent defect to the lessee and it is vital to disclose such defects as they interfere with the enjoyment of the property by the lessee. A lessee is permitted to uphold a suit in his own name against trespassers and strangers.

In this case, ownership is what makes the difference in the definition of lessor and lessee. A very good example o help understand how to define lessor and lessee is the owner of real estate property. Whoever wishes to stay in his or her house must pay a certain amount of money as rent to the landlord.

That the lessor should provide the agreement and the lessee should receive and approve the contract with no type of unnecessary pressure, intimidation. As soon as lessee agrees to the contract, the lease would turn out to be lawful and legitimate in the eyes of law. That for the valid lease, the lessor should hold the ownership and power to create and produce the lease. Lease is a contractual agreement made between two parties and therefore, it must follow the essential elements of a valid contract given under Indian Contract Act, 1872. Essential elements like Offer, Acceptance, Consideration, Lawful Object, Intention of the Parties, Competency, Capacity to Contract, Subject Matter, Writing and Registration etc, are important to be followed in the Contract of Lease.

Such addition can be natural or by the expense of the lessee but after the termination of the tenancy period, the lessee must deliver the title to the lessor. We already know who is a lessor, so legally a lessor is granted certain rights and certain liabilities. Section 108A talks about the rights and liabilities of a lessor, so let’s further analyse the rights and liabilities of a lessor. There are certain differences between an agreement to lease and a lease agreement but both of these terms are often confusing for common people and it makes them vulnerable.


The Lease agreement is made similar to a valid contract mentioned under the Indian Contract Act, 1872. It is a bi-partied agreement where the parties transfer the property rights for certain share of profit or service made on the immovable property. It has various types and essentials mentioned under the Act. In the contractual agreement of lease, transfer of the right of property is made and the parties exchange the right of possession of the property for a certain period of time and do not exchange the ownership of the immovable property. Lawful consideration is necessary for the fulfillment of a contract of lease.

  • While the transaction, recordings are made in the books of the lessee.
  • During the contract, the lessor retains the right of ownership of the property and is entitled to receive periodic payments from the lessee based on their initial agreement.
  • The lessor is often referred to as the landlord or property owner.
  • This type of lease is used for assets that require specialized maintenance and services.
  • This list is not exhaustive and is an example of any situation that may happen.

Generally, Lessees are required to adhere to the guidelines and restrictions while using the property, such as applying mileage limits on a leased vehicle. Before discussing the Subject ‘GST on Lease & rental Services With or Without Operators’ it is important to under the meaning of Lease, Rental and License. Samisti Legal is a corporate law firm with an experienced set of inter-disciplinary legal professionals with an unwavering focus on providing advice based on the business intent. Prevent the lessee from sub-letting the property to any third party without seeking prior consent of the lessor. Prevent the lessee from using the property for any purpose other than the purpose of the agreement. Right to inspect the property at all reasonable times during the term of the agreement.