The lease agreement is an agreement documented between the lessor (owner of the asset) and the lessee (user of the asset) stating the terms and structure of the lease. All the future actions of lessee and lessor relevant to the asset under the lease are guided by this written lease agreement. Agreement of lease is very carefully drafted to include all the future situations.
The lease agreement is a written legal document signed by both the lessor and the lessee and thereby agreeing to the terms and conditions mentioned in the agreement of lease. Not only does the agreement cover the basic details like the asset, lease rental etc but it extensively covers all the important points which may form part of a conflict between the parties during the period of lease. A good lease agreement will have crystal clarity on all the terms just like the constitution of a country.
Content of a lease agreement
Contents of a lease agreement would be different for different types of leases. On the basis of different dimensions, there can be different leases like finance lease and operating lease, direct lease and sale and lease back lease, single investor and leveraged lease, and domestic and international lease. Contents of a lease would also depend on the industry and the asset under review. A residential property lease, plant and machinery lease, a car lease, or music system lease will be different because the asset involved is completely different from each other in terms of its importance and costs.
Although following points will cover all the typical clauses of a lease agreement, it is not an exhaustive list.
- Particulars of the Parties: Lessor and Lessee are required to state clearly, their names and addresses. Third party information should also be included in case of leveraged lease, tripartite agreement etc.
- Description of the Asset: Name and identification of the asset with its information on economic or domestic usage. Name of the manufacturer, capacity etc in the case of a big plant or machinery. Complete address and covered area in case of a residential property.
- Primary Period, Effective Date and Renewal: Period of the lease should be mentioned in this clause with its clause on renewal after the primary period. The effective date and time of the beginning and ending of the lease agreement to be written here.
- Initial / Security Deposit, Lease Rental and Payment Terms: In this point, an amount of initial deposit should be cited with clarification on whether the security deposit is interest bearing or interest-free. Lease rental is mentioned with the mode of payment, (NEFT/RTGS, Cheque, Wire Transfer etc.) currency of payment, and frequency of payments etc. Penalty information in case the lease rental is not paid on time. Advance rent, if payable and the procedure of adjustment in further payments. Rent escalation clause and the conditions under which it can be exercised.
- Manufacturer’s warranty: Warranty information is cited with its scope and validity.
- Ownership: In most of the long term leases, the ownership of the asset is transferred. But, it is not necessary as it depends on this clause agreed between the lessor and lessee.
- Equipment Delivery and Installation: Delivery and installation of equipment at the starting of the lease and at the end of the lease has to be revealed in advance. It is because the delivery of a big plant or machinery is a costly affair.
- Repair and Alteration: Clarification with respect to services like repair and alteration needs to be done because it may pose problems between the parties in case such a requirement arises.
- Insurance: Who will bear the cost of insuring the asset, the owner (lessor) or the user (lessee)?
- Sub-Lease: Is the lessee allowed to sub-lease the asset if he is not able to use the asset for any reason.
- Surrender: Can the asset be surrendered during the period of the lease? If yes, what penalties will be charged?
- Default: In the case of default in the payment of lease rentals, what are the circumstances and what are the steps that can be taken by the lessor.
- Arbitration: Details of arbitration should be mentioned in case such a situation arises even after the careful drafting of the agreement.
- Government Dues: Who will pay the municipal dues, property taxes, etc.
- Termination of Lease Agreement: Grounds, under which either of the parties can terminate the agreement and the notice period to be given to each other.
- Restricted Activity: It is ideal to list down the activities restricted by the owner to avoid any future issues.
It is a long list but not comprehensive. In essence, a lease agreement should be as exhaustively written as it is possible to avoid any future conflict between the parties. An ideal agreement of lease will not find any issue out of its scope in the life of the lease agreement.Last updated on : August 31st, 2017