Lessor and Lessee are two parties to a lease agreement. An agreement or a contract by which the owner (lessor) of a specified asset grants permission to another party (lessee) to use the asset for a specific period of time and with defined terms and conditions in return for periodic rentals is termed a lease.
Meaning of Lease
An agreement or a contract by which the owner of a specified asset grants permission to another party to use the asset for a specific period of time and with defined terms and conditions in return for periodic rentals is termed a lease. The specified asset can be land, building, machinery, or equipment. The lessee pays rentals in the form of lease payments either at periodic intervals or a one-time payment to the lessor.
Lessor and Lessee Meaning
The two parties that are involved in the agreement are the lessor and the lessee. A lessor is a person or a party who owns the asset under the lease agreement. The lessor holds legal rights over an asset. On the other hand, a lessee is a person or a party who takes the asset on lease from the lessor (owner of the asset). The lessee is often termed a tenant. The lessee is required to oblige to the terms and conditions mentioned in the lease agreement. If the lessee violates any terms of the agreement, the lease agreement is considered void.
For example, John acquires property from Smith on lease. Here, John is the lessee, and Smith is the property owner and is the lessor. The lease agreement defines the terms and conditions of using the property. John will pay lease rentals to Smith on acquiring the right to use the property.
Also Read: Operating OR Service Lease
Lessor vs. Lessee
The lessor and the lessee are vastly different entities. The lessor is someone who owns the asset. The asset can be a trademark, copyright, equipment, intellectual property, business, etc. The lessee is someone who signs the lease agreement to use the asset.
By entering into a lease agreement, the lessee only acquires the right to use an asset for a definite period of time, but the legal ownership of the asset stays with the lessor. The accounting for lease is different for both.
For a detailed understanding, check – Lease accounting by Lessee and Lessor.
Lessor and Lessee Agreement
The lease agreement is an undertaking between the lessor and the lessee to use the asset. The agreement defines the terms and conditions and sets the obligations established by the court of law and other important matters associated with the usage of an asset. Both the parties are required to oblige to the terms laid. If the lessee performs any act that is against the entered lease agreement, then the lessor being the legal owner of the asset, holds the right to cancel the lease agreement or evict the lessee from the lease agreement. There are various types of lease agreements (such as equipment lease agreements, car leases, etc.) that can be entered depending on the suitability of the parties.
Lease agreements are important for any business organization to grow at an affordable cost. The agreement is entered between a lessee and a lessor. The lease agreement is important as it clearly defines the provisions relating to the use of assets. Both are required to function as per the understanding of the lease agreement.