2. A lease transaction is a commercial arrangement
whereby an equipment owner or Manufacturer conveys
to the equipment user the right to use the equipment in
return for a rental.
Lease is a contract between the owner of an asset (the
lessor) and its user (the lessee) for the right to use the
asset during a specified period in return for a mutually
agreed periodic payment (the lease rentals).
3. •Parties to the contract
•Ownership separated from user
•Term of lease
4. The lease is renewed on a perpetual basis or for a
The asset reverts to the lessor.
The assets reverts to the lessor and the lessor sells it to
a third party.
The lessor sells the asset to the lessee.
5. The lessee chooses the equipment and the
The supplier provides a quotation to lessee.
The lessee submits an application to the lessor.
The lessor and lessee sign a lease contract.
The supplier delivers the equipment to the lessee.
The lessor registers and insures the equipment.
6. Lease agreements are basically of two types.
The other variations in lease agreements are
Sale and lease back
7. Long-term, non-cancellable lease contracts are known
as financial leases.
The lease agreement is irrevocable.
The essential point of financial lease agreement is that
it contains a condition whereby the lessor agrees to
transfer the ownership of the asset at the end of the
lease period at a nominal cost.
At lease, it must give an option to the lessee to
purchase the asset he has used at the expiry of the lease
or return it.
8. An operating lease stands in contrast to the financial
lease in almost all aspects.
This lease agreement gives to the lessee only a limited
right to use the asset.
The lessor is responsible for the upkeep and
maintenance of the asset.
The lessee is not given any uplift to purchase the asset
at the end of the lease period.
The primary lease period does not cover the cost of the
9. Here, the owner of an asset sells the asset to
a party (the buyer), who in turn leases back
the same asset to the owner in consideration
of lease rentals.
However, under this arrangement, the assets
are not physically exchanged but it all
happens in records only.
This is nothing but a paper transaction.
10. Under leveraged leasing arrangement, a third party is
involved beside lessor and lessee.
The lessor borrows a part of the purchase cost (say
80%) of the asset from the third party i.e., lender and
the asset so purchased is held as security against the
The lender is paid off from the lease rentals directly by
the lessee and the surplus after meeting the claims of
the lender goes to the lessor.
11. Under direct leasing, a firm acquires the right to use an
asset from the manufacturer directly.
The ownership of the asset leased out remains with the
The major types of direct lessor include manufacturers,
finance companies, independent lease companies,
special purpose leasing companies etc
12. Provisions under Contract Act relating to lease:
two parties - lessor , lessee.
Transfer of possession of goods from (lessor)
to (lessee), for a specific purpose.
As under lease, on accomplishment of
purpose the goods transferred from lessee to
13. Pay the lease rentals periodically.
Take reasonable care of the asset If he fails he is liable to for loss or
Use the asset carefully.
Report the issues regarding the asset to lessor.
If goods damaged despite of reasonable care, (floods, riots etc), then
the lessee is not responsible.
The lessee is not allowed to use the leased asset , for any purpose
other than one specified in the lease agreement.
If he does so , then the lease agreement is terminated, and lessor
recovers the possession of the goods.
Return the leased asset.
14. Deliver the asset to the lessee.
Authorize the lessee to use the asset.
Leave the asset in peaceful possession.
Periodically service as per contract.
Do all the clearance of the asset as per contract.
all known defects to be disclosed. If not then the lessor has to
compensate the losses incurred by the lessee due to such
forfeiture of all lease rentals paid up to the date of termination,
even if it exceeds the amt. of benefit received by the lessee.
The depreciation can be claimed by the lessor and not
Depreciation can be charged as a tax deductible
expense item by lessor.
The lease rentals received by lessor are taxable as
profit & gain from business
The lease rentals and Insurance, repairs, maintenance
charges paid by lessee are tax deductible items of
expenses for the lessee