what does assignment by lessor mean

Assignment by lessor

Assignment by lessor clause samples

11. ASSIGNMENT BY LESSOR . LESSEE ACKNOWLEDGES THAT LESSOR MAY SELL, ASSIGN, GRANT A SECURITY INTEREST IN, OR OTHERWISE TRANSFER ALL OR ANY PART OF ITS RIGHTS, TITLE AND INTEREST IN THIS LEASE AND THE EQUIPMENT WITHOUT NOTICE TO OR CONSENT OF LESSEE. Upon Lessor’s written notice to Lessee that this Lease, or the right to the Rental Payments hereunder, have been assigned, Lessee shall, if requested, pay directly to Lessor’s assignee without abatement, deduction or set-off all amounts which become due hereunder. Lessee acknowledges that any assignment or transfer by Lessor does not materially change Lessee’s duties or obligations under this Lease nor materially increase the burdens or risks imposed on Lessee.

06/29/2018 (Desert Hawk Gold Corp.)

17. ASSIGNMENT BY LESSOR . Lessor may sell or assign its rights and interests or grant a security interest in this Lease and the Equipment for purposes of securing loans to Lessor or otherwise, and may also sell and assign its title and interest as owner of the Equipment and/or as Lessor under this Lease. Lessee hereby (a)consents to such sales or assignments; (b)agrees to promptly sign and deliver such further acknowledgments and other documents as may be reasonably requested by Lessor to effect such sales or assignments; (c)agrees that any security assignee shall have all the rights, but none of the obligations, of Lessor under this Lease, except Lessor’s obligation not to disturb Lessee’s quiet possession and use of the Equipment, provided Lessee is not in default hereunder; and (d)upon written notice from Lessor, agrees to pay all rent and other sums payable under this Lease to such assignee designated by Lessor (or to any other party subsequently designated by such assignee) without any abatement, reduction, setoff, defense or counterclaim that Lessee may have against Lessor, Lessee’s sole remedy therefor being a claim for damages or injunctive relief against Lessor.

09/11/2019 (Stabilis Energy, Inc.)

Section14.2. Assignment by Lessor. Prior to January2, 2009, Lessor shall not assign or transfer any or all of its interests under this Lease without Lessee’s prior written consent, which consent Lessee agrees not to unreasonably withhold or delay. On or after January2, 2009, Lessor may assign or transfer any or all of its interest under this Lease without Lessee’s prior consent; provided that Lessor may not assign or transfer any or all of its interests under this Lease to a competitor of Lessee, Compression Polymers Corp., or CPCapitol Acquisition Corp. or any of their affiliates.

09/20/2019 (CPG Newco LLC)

11.01Assignment by Lessor. Lessor shall the absolute and unconditional right to assign this Lease without the written consent of Lessee.

06/01/2020 (Vroom, Inc.)

Section14.01. Assignment by Lessor. As a material inducement to Lessor’s willingness to enter into the transactions contemplated by this Lease (the “Transaction”) and the other Transaction Documents, Lessee hereby agrees that Lessor may, from time to time and at any time and without the consent of Lessee, engage in all or any combination of the following, or enter into agreements in connection with any of the following or in accordance with requirements that may be imposed by applicable securities, tax or other Laws: (a)the sale, assignment, grant, conveyance, transfer, financing, re-financing, purchase or re-acquisition of all, less than all or any portion of the Properties, this Lease or any other Transaction Document, Lessor’s right, title and interest in this Lease or any other Transaction Document, the servicing rights with respect to any of the foregoing, or participations in any of the foregoing; or (b)a Securitization and related transactions. Without in any way limiting the foregoing, the parties acknowledge and agree that Lessor, in its sole discretion, may assign this Lease or any interest herein to another Person (including without limitation, a taxable REIT subsidiary) in order to maintain Lessor’s or any of its Affiliates’ status as a REIT. In the event of any such sale or assignment other than a security assignment, Lessee shall attorn to such purchaser or assignee (so long as Lessor and such purchaser or assignee notify Lessee in writing of such transfer and such purchaser or assignee expressly assumes in writing the obligations of Lessor hereunder from and after the date of such assignment). At the request of Lessor, Lessee will execute such documents confirming the sale, assignment or other transfer and such other agreements as Lessor may reasonably request, provided that the same do not increase the liabilities and obligations of Lessee hereunder. Lessor shall be relieved, from and after the date of such transfer or conveyance, of liability for the performance of any obligation of Lessor contained herein, except for obligations or liabilities accrued prior to such assignment or sale.

08/23/2016 (21st Century Oncology Holdings, Inc.)

24.2 Sale or Assignment by LESSOR. Subject to LESSEE’s rights pursuant to this Lease, LESSOR may at any time and without LESSEE’s consent sell, assign or transfer its rights and interest hereunder or with respect to the Aircraft to a third party (“LESSOR’sAssignee”). For a period of * (*) years after such sale or assignment and at LESSEE’s cost, LESSEE will continue to name LESSOR as an additional insured under the Aviation and Airline General Third Party Liability Insurance specified in Exhibit C.

11/14/2018 (AIR T INC)

Section 14.01.Assignment by Lessor.As a material inducement to Lessor’s willingness to enter into the transactions contemplated by this Lease (the “Transaction”) and the other Transaction Documents, Lessee hereby agrees that Lessor may, from time to time and at any time and without the consent of Lessee, engage in all or any combination of the following, or enter into agreements in connection with any of the following or in accordance with requirements that may be imposed by applicable securities, tax or other Laws: (a)the sale, assignment, grant, conveyance, transfer, financing, re‑financing, purchase or re‑acquisition of all, less than all or any portion of the Properties, this Lease or any other Transaction Document, Lessor’s right, title and interest in this Lease or any other Transaction Document, the servicing rights with respect to any of the foregoing, or participations in any of the foregoing; or (b)a Securitization and related transactions.Without in any way limiting the foregoing, the parties acknowledge and agree that Lessor, in its sole discretion, may assign this Lease or any interest herein to another Person in order to maintain Lessor’s or any of its Affiliates’ status as a REIT so long as such Person expressly assumes in writing the obligations of Lessor hereunder from and after the date of such assignment.In the event of any such sale or assignment other than a security assignment, Lessee shall attorn to such purchaser or assignee (so long as Lessor and such purchaser or assignee notify Lessee in writing of such transfer and such purchaser or assignee expressly assumes in writing the obligations of Lessor hereunder from and after the date of such assignment).At the request of Lessor, Lessee will execute such documents confirming the sale, assignment or other transfer and such other agreements as Lessor may reasonably request, provided that the same do not increase the liabilities and obligations of Lessee hereunder or adversely impact the rights of Lessee hereunder.Lessor shall be relieved, from and after the date of such transfer or conveyance, of liability for the performance of any obligation of Lessor contained herein, except for obligations or liabilities accrued prior to such assignment or sale (including, without limitation, Lessor’s obligation to deliver any Reserve currently held by Lessor to such purchaser or assignee).

11/09/2018 (AMPCO PITTSBURGH CORP)

daños que sufra el área del Estacionamiento Lote Sur y por todas las reparaciones necesarias incluyendo sin limitar a aquellas causadas por el desgaste de la carpeta asfáltica, base y sub-base, por el uso normal o el que se le haya dado a dicha área. Las Partes acuerdan que el Arrendatario o su subarrendatario deberán dar mantenimiento al Estacionamiento Lote Sur, incluyendo sin limitar a la carpeta asfáltica a su propio costo y gasto durante el Plazo del Arrendamiento. The Parties agree that Lessee or its sublease shall maintain the South Parking Lot, including but not limited to the asphalt carpet surface at their own cost and expense during the entire Lease Term. c) Cesión del Arrendador. El Arrendador podrá ceder en todo o en parte sus derechos y obligaciones derivados de este Arrendamiento, incluyendo sus derechos de cobro, así como para transmitir la propiedad de y/o hipotecar o en cualquier forma gravar o constituir garantías sobre la Propiedad Arrendada y/o los derechos derivados de este Arredramiento a cualquier tercero sin necesidad de autorización previa del Arrendatario, en cuyo caso, el Arrendador deberá notificar al Arrendatario de cualquier cesión hecha por él, dentro de los 30 (treinta) días siguientes a dicha cesión. Lo anterior, en el entendido de que este Arrendamiento continuará en vigor, conforme a lo dispuesto por las leyes aplicables. c) Assignment by Lessor. Lessor may assign in whole or in part its rights and obligations derived from this Lease, including its collecting rights, as well as to transfer title to and/or mortgage or in any other manner to encumbrance or constitute guarantees over the Leased Property and/or the rights derived from this Lease to any third party without requiring prior Lessee’s authorization, in which case, Lessor shall notify Lessee of any assignment made by it, within the 30 (thirty) days following such assignment. The foregoing in the understanding that this Lease shall continue in force, as provided by the applicable laws. VIGÉSIMA NOVENA.- NOTIFICACIONES Y DOMICILIOS.

06/17/2016 (TPI COMPOSITES, INC)

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Assignment vs Subletting - What is the difference?

Assignment vs subletting – what are the differences.

Assigning a residential lease agreement and subletting are two distinct ways of transferring tenancy rights in a rental property, each involving different legal and practical implications. Here’s a breakdown of their differences:

Assignment of a Residential Lease Agreement:

Definition:

Transfer of Responsibility: Assigning a lease involves transfer of the original tenant’s entire interest in the lease to a new tenant. The original tenant ceases to have any rights or obligations related to the property.

Consent from Landlord: Typically requires the landlord's explicit permission or consent. The landlord is often involved in vetting and approving the new tenant.

Replacement Tenant: The original tenant may find a replacement (assignee) who takes over the lease entirely. The landlord may also market for a new tenant and vet any potential replacement tenants.

Legal Responsibility:

Liability: The assignor (original tenant) is usually released from all liabilities and obligations once the lease is assigned to the new tenant.  This may key off of the new tenant taking possession of the rental unit.

Direct Relationship with Landlord: The new tenant (assignee) becomes directly responsible to the landlord for rent payments, property maintenance, and adherence to lease terms by effectively “stepping into the shoes” of the departing tenant.

Implications:

End of Original Tenancy: For the assignor, once the lease is assigned, their association with the property generally ends. They may not have recourse if the assignee defaults on payments or breaches the lease.

Subletting of a Residential Lease Agreement:

Partial Transfer: Subletting occurs when the original tenant rents out all or part of the property to a subtenant while retaining some rights and responsibilities under the original lease.

Consent from Landlord: Usually requires the landlord's permission, as outlined in the lease agreement. Some leases explicitly prohibit subletting.

Ongoing Relationship with Landlord: The original tenant (sublessor) maintains responsibility to the landlord for lease obligations.

Obligations: The sublessor remains responsible for rent payments and adherence to lease terms, acting as an intermediary between the landlord and subtenant.

Relationship with Subtenant: The sublessee has a legal relationship with the sublessor rather than the landlord. The sublessee must adhere to terms agreed upon in the sublease.

Ongoing Responsibility: The original tenant (sublessor) remains liable to the landlord for the property and its condition. They're responsible for any damages or lease violations caused by the sublessee.

Continued Tenancy: The original tenant maintains an ongoing relationship with the property and the landlord.

How Much Would Your Home Rent For?

Key Differences: 

• Transfer of Responsibility:  Assigning a lease completely transfers the tenant's interest to a new tenant, while subletting involves the original tenant retaining some rights and responsibilities.
• Direct Relationship : In assignment, the new tenant has a direct relationship with the landlord, whereas in subletting, the original tenant maintains this relationship. 
• Liability and Obligations:  Assigning a lease typically releases the original tenant from obligations, while subletting keeps them responsible for the property.

Both assignment and subletting can offer flexibility to tenants but come with distinct legal and practical implications that tenants and landlords should carefully consider before proceeding. Understanding these differences helps individuals choose the appropriate option based on their circumstances and lease agreement terms.

In most cases, assignment is the best course as it avoids the main pitfall of subletting, namely that the subletting tenant has no direct relationship or responsibility to the landlord/owner of the rental unit.  For that reason, professional property managers normally recommend termination of the original lease and negotiation of a new lease with the replacement tenant.  The outgoing tenant will normally absorb some of the costs associated with securing a replacement and the property manager makes sure the turnover is handled property.  Having experience when these issues arise is important to protect the landlord’s interests.  If you need management of an investment property, call one of our managers today to learn why so many landlords believe TREG is the RIGHT CHOICE for property management.

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The Real Estate Group Customer Reviews

Lessor vs. Lessee: How Are They Different?

A lessor leases property to a lessee who rents the property. Learn the rights and responsibilities of each, why they matter, and common lease types.

Learn more about commercial leases

by   Fabrienne Bottero

Fabrienne is a writer and journalist who specializes in branding and content strategy. In the last five years, s...

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Updated on: August 14, 2024 · 8 min read

Lessor vs. lessee at a glance

Lessor vs. lessee: roles and responsibilities, key differences between a lessor and a lessee, types of lease agreements, why does a strong lease agreement matter.

When we think of leases, we often think of a landlord and a tenant. While commercial and residential real estate are common, you can lease almost any asset. Equipment, vehicles, and even trademark leases are important aspects of our economy and sometimes our daily lives. 

No matter the asset, the cornerstone of every contract is a strong relationship between the lessor and lessee. Building this relationship starts with a deep understanding of your role.

Both parties enter into a contract called a lease or rental agreement, typically for residential or commercial real estate . The lessee makes payment(s) to the lessor for use of the property or asset.

Lessor meaning: The owner of an asset who grants the right to use it to another party through a lease agreement. The property owner can be an individual or a company.

Lessee meaning: The other party who obtains the right to use an asset. The lessee can also be an individual or company.

Lease vs. rental agreement: Rental agreements are typically short-term or month-to-month, while lease agreements are often six months or more.

While the details of this dynamic will depend on the context of the lease, there are common obligations that each party should consider before entering into a new contract.

Successfully navigating these duties depends on clear communication, comprehension of legal rights and responsibilities, and cooperation between both parties regardless of the leasing situation.

Lessor roles and responsibilities:

• Payment: The lessor dictates the amount, frequency, and duration of lease payments.
• Maintenance: The lessor is responsible for major, and sometimes minor, repairs to the asset while it is in their care or if it's a real estate property.
• Negotiations: The lessor communicates with the lessee to negotiate the terms of the lease. For example, a lessor may want to raise the lease price based on market trends.
• Security deposit: The lessor may retain or deduct from the security deposit to fund any damages to the asset that the lessee caused.

Lessee roles and responsibilities:

• Payment: The lessee is responsible for making periodic payments in accordance with the terms of the lease. For example, by the due date specified in the contract.
• Maintenance: The lessee is responsible for maintaining the asset's original condition, with the exception of normal wear.
• Negotiations: The lessee can negotiate the terms of the lease with the lessor for more favorable terms. Doing so can avoid confusion or unfavorable circumstances down the line.
• Security deposit: The lessee can document the condition of the asset to avoid paying for pre-existing damages.

These differences will vary depending on the type of lease you have, so we always recommend seeking  legal advice to best understand each party's rights and responsibilities in your specific case.

That said, here is a brief overview of the key differences between a lessor and lessee across most lease agreements:

The lessor retains ownership rights, while the lessee has usage rights for the duration of the lease agreement. Although the lessee can negotiate certain privileges—such as early termination of the lease, renewal with unchanged terms, or permission to sublease—whether or not to accept these terms is ultimately up to the lessor.

Control and responsibilities

Most jurisdictions have an implied warranty of habitability that requires landlords to keep the property livable and consistent with local housing codes. That said, responsibilities for property maintenance and expenses can vary depending on the type of lease agreement and the lessor sets the terms.

For real estate, vehicles, and equipment, the lessee is responsible for maintaining the original condition of the asset. For example, they'll have to pay to fix any damages they've directly or passively caused to the asset.

Financial aspects

The lessor receives periodic lease payments from the lessee based on the terms of their contract, which can be monthly, quarterly, or yearly, depending on the lease. The lessee is responsible for regularly making payments based on the terms of the contract​.

In this way, the lessor generates income from leasing the asset, and the lessee uses the asset without having to pay the full purchase price. In some cases, the lessee and lessor can agree on a lease-to-buy option, in which lease payments eventually convert into a down payment to purchase the leased asset.

Rights and obligations

The lessor has the authority to enforce lease terms and take action if the lessee fails to comply​. The lessee must comply with all lease terms, and any changes to the property usually require lessor approval.

That said, if the lessor fails to maintain the asset to meet legal and safety standards, the lessee can withhold lease payments until those standards are met, as long as they're in a jurisdiction that follows the habitability warranty mentioned above.

Both parties can request proof of reliability. For example, a lessor can request evidence of reliable income or credit, and the lessee can request proof of ownership and evidence of the asset's good condition.

Use and access

In some cases, the lessor may have restricted access to the property or asset unless specified otherwise in the lease agreement. The lessee typically enjoys exclusive use of the asset during the lease term. This right is called quiet enjoyment , which protects a lessee's right to use the property or asset undisturbed.

These are some of the common types of lease agreements.

• Operating lease : Typically for short-term usage. The lessor maintains ownership and responsibility for asset maintenance, but the lessee won't have an option to eventually purchase.
• Gross lease : The lessor covers all property-related expenses, such as maintenance, taxes, and insurance, while the lessee pays a single, fixed lease amount. A  gross lease makes budgeting easier but can result in higher rents​.
• Triple net lease : The lessee is responsible for property taxes, insurance, and maintenance costs in addition to the rent. In a triple net lease , the base rent is typically lower because the lessee manages all the operating costs.
• Capital lease : A long-term lease in which the lessee assumes ownership responsibilities with the option to buy; it’s often recorded as an asset and liability on balance sheets (financial statements). A capital lease agreement is also known as a finance lease.
• Sale and leaseback : An asset owner—typically a company—can sell their property and then lease it from the new owner. A company may choose to do this in order to receive substantial funds from the sale while maintaining usage rights.

A strong lease agreement is essential for lessors and lessees as it establishes clear terms that consider both parties, which is necessary for a legally binding partnership. An attorney can be an invaluable asset to ensure a strong lease. We can help you find an attorney who will create, revise, and customize a commercial lease for you.

Clarity and enforceability

A well-drafted lease agreement provides clear terms and conditions, reducing the potential for misunderstandings. It serves as a legally binding document that can dictate how courts proceed if disputes arise​. It clearly outlines the rights and responsibilities of both parties, protecting their interests and ensuring that both parties understand their obligations​.

Financial security

The agreement defines the rental amount, payment frequency, and any penalties for late payments. This ensures that the lessor receives timely compensation and the lessee understands their financial obligations​. It also includes details about security deposits, additional fees, and conditions under which these are returned.

Conflict resolution

Dispute resolution mechanisms—such as mediation or arbitration —included in the agreement offer a faster and less costly alternative to litigation​. It also specifies the conditions under which either party can terminate the lease, as well as other conditions that lessors and lessees can refer to when settling possible disputes.

Asset protection

An agreement that specifies maintenance responsibilities ensures that the property or asset is adequately cared for during the lease term and prevents potential misuse or damage. Although the law requires landlords (real estate lessors) to meet local building and housing codes, it's possible to assign some maintenance to the tenant in the lease agreement.

Flexibility and customization

Lease agreements can be customized to fit the specific needs of the lessor and lessee, including lease duration, renewal options, and special conditions​. They can include specific clauses—such as early termination options, buyout clauses, or rights of first refusal, which allow the lessee the first choice to renew the lease or not before the lessor can seek a new lessee.

Compliance and risk management

A comprehensive agreement ensures compliance with local, state, and federal laws. The lease can limit the liability of both parties by specifying conditions under which each party is responsible for damages or losses, reducing the risk of costly legal battles. It can require insurance coverage for certain risks , ensuring both parties are protected financially in case of accidents or damage.

Can a lease agreement be terminated early?

Yes, either party can terminate an agreement early if one party violates the terms of the contract or early termination is granted in the terms of the agreement.

What happens if a lessee defaults on lease payments?

Usually, three months of missed payments will warrant a default. In that case, the lessor will likely repossess the asset. Failure to resolve the default can lead to evictions, lawsuits, collections, and judgments. This could impact your credit and ability to lease or buy in the future.

Can a lessee make changes to the leased property or asset?

Sometimes, a lessee can request that the lessor modify the property or asset. If the request is accepted, the lessee is free to make the agreed-upon changes. The lessor may also deny the request, meaning the lessee cannot make the requested modifications.

Is a landlord a lessor?

Yes, a landlord is a lessor of real estate property, either residential or commercial. 

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Assignment of Rents – What, Why, and How?

Article by:

Madelaine prescott, esq., share this post:.

• November 29, 2023

These days, almost all commercial loans include an Assignment of Rents as part of the Deed of Trust or Mortgage. But what is an Assignment of Rents, why is this such an important tool, and how are they enforced?

An Assignment of Rents (“AOR”) is used to grant the lender on a transaction a security interest in existing and future leases, rents, issues, or profits generated by the secured property, including cash proceeds, in the event a borrower defaults on their loan. The lender can use the AOR to step in and directly collect rental payments made by the tenant. For an AOR to be effective, the lender’s interest must be perfected, which has a few fairly simple requirements. The AOR must be in writing, executed by the borrower, and recorded with the county where the property is located. Including an AOR in the recorded Deed of Trust or Mortgage is the easiest and most common way to ensure the AOR meets these requirements should it ever need to be utilized.

When a borrower defaults, lenders can take advantage of AORs as an alternative to foreclosure to recoup their investment. With a shorter timeline and significantly lower costs, it is certainly an attractive option for lenders looking to get defaulted borrowers back on track with payments, without the potential of having to take back a property and attempting to either manage it or sell it in hopes of getting your money back out of the property. AORs can be a quick and easy way for the lender to get profits generated by the property with the goal of bringing the borrower out of default. But lenders should carefully monitor how much is owed versus how much has been collected. If the AOR generates enough funds so that the borrower is no longer in default, the lender must stop collecting rents generated by the property.

Enforcement of an AOR can also incentivize borrowers to work with the lender to formulate a plan, as many borrowers rely on rental income to cover expenses related to the property or their businesses. Borrowers are generally more willing to come to the table and negotiate a mutual, amicable resolution with the lender in order to protect their own investment. A word of warning to lenders though: since rental income is frequently used to pay expenses on the property, such as the property manager, maintenance, taxes, and other expenses, the lender needs to ensure they do not unintentionally hurt the value of the property by letting these important expenses fall behind. This may hurt the lender’s investment as well, as the property value could suffer, liens could be placed on the property, or the property may fall into disrepair if not properly maintained. It is also important for lenders to be aware of the statutes surrounding the payment of these expenses when an AOR is being used, as some state’s statutes require the lender to pay certain property expenses out of the collected rents if requested by the borrower.

In addition to being shorter and cheaper than foreclosure, AORs can be much easier to enforce. In California, the enforcement of an AOR is governed by California Civil Code §2938. This statute specifies enforcement methods lenders can use and restrictions on use of these funds by the lender, among other things. Under CA Civil Code §2938(c), there are 4 ways to enforce an AOR:

• The appointment of a receiver;
• Obtaining possession of the rents, issues, profits;
• Delivery to tenant of a written demand for turnover of rents, issues, and profits in the correct form; or
• Delivery to assignor of a written demand for the rents, issues, or profits.

One or more of these methods can be used to enforce an AOR. First, a receiver can be appointed by the court, and granted specific powers related to the AOR such as managing the property and collecting rents. They can have additional powers though; it just depends on what the court orders. This is not the simplest or easiest option as it requires court involvement, but this is used to enforce an AOR, especially when borrowers or tenants are uncooperative. Next is obtaining possession of the rents, issues, profits, which is exactly as it seems; lenders can simply obtain actual possession of these and apply the funds to the loan under their AOR.

The third and fourth options each require delivery of a written demand to certain parties, directing them to pay rent to the lender instead of to the landlord. Once the demand is made, the tenant pays their rent directly to the lender, who then applies the funds to the defaulted loan. These are both great pre-litigation options, with advantages over the first two enforcement methods since actual possession can be difficult to obtain and courts move slowly with high costs to litigate. The written demands require a specific form to follow called the “Demand To Pay Rent to Party Other Than Landlord”, as found at CA Civil Code §2938(k). There are other notice requirements to be followed here, so it is essential to consult with an experienced attorney if you are considering either of these options. California Civil Code §2938 specifically provides that none of the four enforcement methods violate California’s One Action Rule nor the Anti-Deficiency Rule, so lenders can confidently enforce their AORs using the above methods with peace of mind that they are not violating other California laws.

Whether you are looking to originate a new loan, or you are facing a default by your borrower, understanding what an Assignment of Rents is and how it operates can be extremely beneficial. Enforcing an AOR can be an easier option than foreclosure and can help promote a good relationship with your borrower when handled correctly. If you have any questions about AORs, or need further details on how to enforce them, Geraci is here to help.

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Lessee vs Lessor: Understanding Leasing Roles and Responsibilities

What is a Lessor and Lessee?

A lessor is the owner of an asset that is leased or rented out to another party. The lessee is the party that obtains the right to use the leased asset from the lessor for a specified period of time in exchange for periodic rental payments.

The fundamental roles of the lessor and lessee are:

• Owns the asset being leased
• Grants the right to use the asset to the lessee 
• Receives rental income from the lessee
• Responsible for maintaining the leased asset

Lessee: 

• Obtains the right to use the leased asset
• Makes periodic rental payments to the lessor
• Can use the asset for business operations or personal use
• Is responsible for maintaining the asset per the lease terms

The lessor-lessee relationship is governed by a lease agreement that outlines the rights, responsibilities, and obligations of each party over the lease term.

Responsibilities of Lessors

As the legal owner of the leased asset, the lessor has several key responsibilities:

Ownership and Maintenance of the Leased Asset

The lessor is responsible for maintaining ownership of the asset throughout the lease term. This includes handling any necessary repairs, maintenance, and upkeep to ensure the asset remains in good working condition. The lessor may pass through certain maintenance costs to the lessee per the lease agreement terms.

Granting Right to Use the Asset to the Lessee

The fundamental responsibility of the lessor is to grant the lessee the right to use the leased asset for the contracted period and specified purposes outlined in the lease agreement. The lessee obtains control over the asset's use but not ownership.

Ensuring Legal and Regulatory Compliance

The lessor must ensure the lease transaction and agreement terms comply with all applicable laws and regulations. This includes tax regulations, accounting standards, consumer protection laws, and any industry-specific rules governing the leased asset class. The lessor is typically responsible for reporting and paying associated taxes.

Responsibilities of Lessees

As the party obtaining the right to use a leased asset, lessees have several key responsibilities:

Proper Usage and Maintenance of the Leased Asset

Lessees must use the leased asset responsibly and per the terms outlined in the lease agreement. This includes adhering to any usage restrictions, performing routine maintenance and repairs, and ensuring the asset is not misused or damaged through negligence.

Adhering to Terms of the Lease Agreement

The lessee is obligated to follow all terms specified in the lease contract. This may include making timely lease payments, maintaining required insurance coverage, allowing lessor inspections, and restricting modifications or alterations to the leased asset without approval.

Return of the Asset at Lease End

When the lease term expires, lessees are typically required to return the leased asset to the lessor in an acceptable condition, subject to normal wear and tear. The asset must be returned per the terms outlined, such as cleaning, repair or restoration requirements to avoid penalties.

Ownership and Usage Rights

The fundamental difference between a lessor and lessee lies in the ownership and usage rights of the leased asset. The lessor retains ownership of the asset being leased, while the lessee obtains the right to use and possess that asset for the duration specified in the lease agreement.

As the legal owner, the lessor holds title to the leased asset on their balance sheet. However, by entering into a lease contract, the lessor grants the lessee the right to use and operate that asset in exchange for periodic rental payments over the lease term.

The lessee, on the other hand, does not own the asset but gains control over its usage for the contracted period. They obtain the rights to deploy, maintain, and benefit from the leased asset as if they were the owner, albeit temporarily and within the terms outlined in the lease agreement.

It's important to note that while the lessee gains possession and usage rights, they cannot claim ownership or sell the leased asset without the lessor's consent. At the end of the lease term, the lessee must return the asset to the lessor or exercise any options specified in the contract, such as extending the lease or purchasing the asset.

Accounting Treatment for Lessors

As the owner of the leased asset, lessors follow specific accounting guidelines to properly record and report lease transactions. The primary accounting treatment for lessors involves recognizing the leased asset on their balance sheet and recording lease income over the duration of the lease term.

Under the lessor accounting model, the leased asset remains on the lessor's books as they retain legal ownership. This asset is typically classified as an investment property or a finance lease receivable, depending on the nature of the lease agreement. The initial value of the asset is equal to the net investment in the lease, which comprises the present value of future lease payments and any unguaranteed residual value.

Throughout the lease term, lessors systematically recognize a portion of the lease income in their income statement. The lease income represents the finance or interest income earned from the net investment in the lease. This income recognition pattern is designed to reflect a constant periodic rate of return on the lessor's net investment.

Lessors must also assess the leased asset for potential impairment and make necessary adjustments to the carrying value if required. Additionally, they are responsible for properly depreciating the leased asset over its useful life, unless the lease transfers ownership to the lessee by the end of the lease term.

Overall, the lessor's accounting treatment aims to accurately reflect the economic substance of the lease transaction, ensuring that the leased asset and the associated lease income are appropriately recognized and reported in their financial statements.

Accounting Treatment for Lessees

Under the current lease accounting standards, lessees are required to recognize most leases on their balance sheets. This is a significant change from the previous standards, where operating leases were kept off the balance sheet.

For lessees, the primary impact is the recognition of a right-of-use (ROU) asset and a corresponding lease liability on the balance sheet. The ROU asset represents the lessee's right to use the underlying asset over the lease term, while the lease liability represents the obligation to make future lease payments.

The initial measurement of the ROU asset and lease liability is based on the present value of the lease payments over the lease term, discounted using the rate implicit in the lease, or if that rate is not readily determinable, the lessee's incremental borrowing rate.

Subsequent to initial recognition, the lessee accounts for the ROU asset similarly to other non-financial assets, such as property, plant, and equipment, by recognizing depreciation expense over the asset's useful life or the lease term, whichever is shorter.

The lease liability is treated similarly to a financial liability, with interest expense recognized using the effective interest method over the lease term. The lease payments are allocated between a reduction of the lease liability and interest expense.

For income statement purposes, lessees recognize a single lease expense, typically on a straight-line basis over the lease term. This expense includes the interest expense on the lease liability and the depreciation expense on the ROU asset.

Overall, the new lease accounting standards aim to provide greater transparency and comparability by recognizing lease assets and liabilities on the balance sheet, which better reflects the economic reality of leasing transactions.

Operating Leases vs. Capital Leases

Operating leases.

An operating lease is a type of lease agreement where the lessor retains the risks and rewards associated with ownership of the leased asset. The lessee only obtains the right to use the asset for a specified period of time in exchange for periodic rental payments. 

Operating leases are generally short-term, and the leased asset is expected to have a useful economic life that extends beyond the lease term. At the end of the lease, the lessee returns the asset to the lessor.

Capital Leases

A capital lease, also known as a finance lease, is a type of lease agreement that transfers substantially all the risks and rewards of ownership to the lessee. The lessee is treated as the economic owner of the leased asset for accounting purposes, even though legal ownership remains with the lessor.

Capital leases are typically long-term, and the lease term covers a significant portion of the asset's useful economic life. The lessee has the option to purchase the asset at the end of the lease term for a bargain price.

Key Differences

Accounting treatment.

• For operating leases, lessors record the leased asset on their balance sheet and recognize lease income over the lease term. Lessees record lease expenses as they are incurred.
• For capital leases, lessors record a lease receivable and derecognize the leased asset. Lessees record both a leased asset and a lease liability on their balance sheet.

Risks and Rewards

• In an operating lease, the lessor bears the risks and rewards of ownership, including maintenance, insurance, and obsolescence.
• In a capital lease, the lessee assumes most of the risks and rewards of ownership, similar to owning the asset outright.
• Operating leases are typically short-term, while capital leases are long-term, often covering a significant portion of the asset's useful life.

Purchase Option

• Operating leases generally do not include a purchase option for the lessee.
• Capital leases often include a bargain purchase option for the lessee at the end of the lease term.

The classification of a lease as operating or capital has significant accounting implications for both lessors and lessees, affecting their financial statements and tax treatment.

Tax Implications

For lessors, leasing out assets provides opportunities for tax deductions. They can deduct depreciation expenses on the leased assets as well as any associated costs like maintenance, insurance, and property taxes. However, lessors must report the lease income received from lessees as taxable income.

Lessees, on the other hand, cannot deduct depreciation on leased assets since they don't own them. However, they can deduct the lease payments made to lessors as a business expense. For capital leases where the lessee assumes ownership risks, they may be able to deduct depreciation-like expenses called "rental depreciation."

The tax treatment differs based on the type of lease (operating vs capital) and the specifics of the lease contract. Lessors and lessees should carefully review the tax regulations and implications of different lease structures when evaluating the after-tax costs and benefits of leasing transactions.

Legal Rights and Protections

Both lessors and lessees have certain legal rights and protections under lease agreements. As the owner of the leased asset, lessors have the right to receive timely lease payments from lessees. If lessees fail to pay, lessors can pursue legal remedies such as sending demand letters, terminating the lease, or filing lawsuits for damages.

Lessors also have the right to inspect the leased property, as long as proper notice is given to lessees. This allows lessors to ensure lessees are properly maintaining the asset. If lessees breach the lease terms by misusing or neglecting the asset, lessors can take action.

Upon lease termination, lessors have the right to regain possession of their asset. If lessees refuse to return the property, lessors can obtain court orders for repossession. Lessors may also have claims against lessees for unpaid rent, repair costs for damages, or losses from an early termination.

On the other hand, lessees have rights to the peaceful enjoyment and undisturbed use of the leased asset, as long as they comply with the lease terms. If lessors interfere with this right, lessees can potentially terminate the lease or seek damages.

Lessees also have the right to make certain modifications or alterations to the leased asset, depending on the lease agreement. Some leases allow lessees to customize the property to suit their needs. Upon termination, lessees may have the right to remove any additions or be compensated for their improvements.

Both parties should thoroughly understand their rights and obligations in the lease contract. Consulting legal counsel can help protect their interests and avoid potential disputes down the road.

End of Lease Term

At the end of a lease term, both the lessor and lessee have several options to consider. The lessee may have the choice to renew the lease for an additional term, often at a predetermined rate specified in the original lease agreement. Alternatively, the lessee could opt to return the leased asset to the lessor in accordance with the contract terms.

If the lease agreement includes a purchase option, the lessee may choose to buy the asset outright at the end of the lease term. The purchase price is typically set at the asset's expected fair market value or a predetermined amount stated in the contract.

For the lessee, returning the leased asset requires adhering to any restoration or return requirements outlined in the lease. These may include cleaning, repairing any damage beyond normal wear and tear, or restoring the asset to its original condition. Failure to meet these requirements could result in financial penalties or fees charged by the lessor.

The lessor's main responsibility at the end of a lease term is to inspect the returned asset and ensure it meets the agreed-upon condition. If the asset requires further maintenance or repairs due to excess wear and tear, the lessor may charge the lessee accordingly or deduct fees from any security deposit.

Leasing vs. Buying

Deciding whether to lease or buy an asset is a significant financial decision that involves weighing the advantages and disadvantages of each option. The choice depends on various factors, including the nature of the asset, the intended use, and the company's financial situation.

Advantages of Leasing

1. lower upfront costs: .

Leasing typically requires a smaller initial outlay compared to purchasing an asset outright. This can be advantageous for businesses with limited capital or those that prefer to preserve their cash flow for other purposes.

2. Flexibility: 

Leases often have shorter terms than the useful life of an asset, allowing businesses to upgrade or replace the asset more frequently as their needs change or as new technology becomes available.

3. Tax Benefits: 

In many cases, lease payments can be deducted as operating expenses, providing potential tax advantages.

4. Off-Balance Sheet Financing: 

Depending on the type of lease, the leased asset and associated liabilities may not appear on the company's balance sheet, potentially improving financial ratios.

Advantages of Buying

1. ownership: .

By purchasing an asset, the company gains full ownership and control over its use and disposal.

2. Long-Term Cost Savings: 

Over the long run, buying an asset can be more cost-effective than leasing, especially if the asset has a long useful life and the company plans to use it for an extended period.

3. Equity Building: 

As the asset is paid off, the company builds equity, which can be leveraged for future financing or sold if no longer needed.

4. Tax Benefits: 

Purchased assets may qualify for depreciation deductions, which can provide tax savings.

Financial Considerations

To determine whether leasing or buying is the better financial option, businesses should consider the following factors:

1. Cash Flow: 

Leasing typically requires smaller periodic payments, which can be beneficial for companies with limited cash flow. Buying, on the other hand, may require a larger upfront payment but potentially lower long-term costs.

2. Residual Value: 

If the asset is expected to have significant residual value at the end of its useful life, buying may be more advantageous as the company can capture that value.

3. Interest Rates: 

The cost of financing a purchase or the implicit interest rate in a lease agreement can significantly impact the overall cost of each option.

4. Obsolescence Risk: 

If the asset is likely to become obsolete quickly, leasing may be preferable to avoid being stuck with an outdated asset.

5. Tax Implications: 

The tax treatment of lease payments versus depreciation deductions can influence the decision, depending on the company's specific tax situation.

Ultimately, the decision to lease or buy should be based on a thorough analysis of the company's financial objectives, operational requirements, and the specific circumstances surrounding the asset acquisition.

Types of Lease Agreements

There are several types of lease agreements that lessors and lessees can enter into, each with its own unique features and implications.

An operating lease is a short-term rental agreement where the lessor retains ownership of the asset. The lessee has the right to use the asset for a specified period but does not assume the risks and rewards of ownership. Operating leases are commonly used for equipment, vehicles, and property rentals. The lease payments are treated as operating expenses by the lessee and rental income by the lessor.

Finance Leases (Capital Leases)

A finance or capital lease is a long-term agreement that transfers most of the risks and rewards associated with ownership to the lessee. The lessee is responsible for maintaining and insuring the asset, and at the end of the lease term, they may have the option to purchase the asset at a predetermined residual value. Finance leases are often used for high-value assets like machinery, equipment, and real estate. The leased asset is capitalized on the lessee's balance sheet, and the lease payments are treated as a combination of interest expense and principal reduction.

Sale and Leaseback

In a sale and leaseback arrangement, the owner of an asset (the lessee) sells the asset to a lessor and then leases it back, typically through a long-term finance lease. This transaction allows the lessee to generate cash from the sale while retaining the use of the asset. Sale and leasebacks are commonly used for real estate and equipment, providing the lessee with liquidity and the lessor with a long-term investment opportunity.

Leveraged Leases

A leveraged lease involves a third party, such as a lender or investor, who provides a portion of the financing for the leased asset. The lessor makes a small equity investment, while the lender provides the majority of the funding. Leveraged leases are complex transactions that offer tax benefits and potential for higher returns for the lessor and lender.

Hire Purchase Agreements

A hire purchase agreement is a type of finance lease where the lessee has the option to purchase the asset at the end of the lease term. During the lease period, the lessee makes regular payments that cover a portion of the asset's value, and at the end, they can exercise the option to purchase the asset by paying the remaining balance or returning the asset to the lessor.

These are the main types of lease agreements, each with its own advantages, disadvantages, and accounting implications for lessors and lessees. The choice of lease type depends on factors such as the nature of the asset, the intended use, financial considerations, and the preferences of the parties involved.

Lease Contract Terms and Clauses

When entering into a lease agreement, both lessors and lessees need to carefully review and negotiate the terms and clauses. Some key areas to focus on include:

Rent and Escalations:

The base rent amount and any provisions for rent increases over the lease term should be clearly specified. Pay close attention to how rent escalations are calculated.

Term and Renewal Options: 

The start and end dates of the initial lease term as well as any renewal option periods and the process to exercise renewals.

Permitted Use:

Ensure the permitted use clause allows your intended property usage and doesn't overly restrict operations.

Operating Expenses:

Provisions allocating responsibility for taxes, insurance, maintenance, and other operating expenses between the parties.  

Improvement Allowances: 

If the lessor is providing any funds for tenant improvements, the amount and disbursement process should be detailed.

Assignment and Subletting:

The ability to assign or sublet the premises, including any restrictions or consent requirements from the lessor.

Defaults and Remedies:

Clearly defined events of default, remedies for the non-defaulting party, notice requirements, and any dispute resolution procedures.

Restoration and Surrender:

Requirements for returning the premises in a specified condition upon lease termination.

Negotiating appropriate terms is crucial, as is ensuring the contract language accurately reflects the agreed-upon deal points. Best practices include involving legal counsel, closely reviewing all terms, and negotiating protections for your interests as a lessor or lessee.

Dispute Resolution and Risk Mitigation

Common disputes between lessors and lessees often arise due to ambiguities in the lease contract, differing interpretations of clauses, failure to comply with obligations, or unforeseen circumstances. Disputes may involve payment issues, usage violations, maintenance responsibilities, or end-of-term disagreements.

To mitigate risks, lessors should ensure lease agreements have clear and comprehensive terms, conduct thorough due diligence on potential lessees, and implement rigorous asset management and monitoring processes. Lessees, on the other hand, should carefully review contracts, maintain open communication with lessors, adequately insure leased assets, and have contingency plans.  

Engaging experienced legal counsel during contract negotiation and dispute resolution can protect both parties' interests. Alternative dispute resolution methods like mediation or arbitration may help resolve conflicts more efficiently than litigation. Ultimately, fostering a collaborative lessor-lessee relationship based on transparency and mutual understanding is crucial for avoiding and resolving disputes effectively.

Understanding the roles and responsibilities of lessors and lessees is essential for anyone involved in leasing transactions. The lessor, as the asset owner, grants usage rights to the lessee in exchange for periodic rental payments. The lessee, on the other hand, obtains the right to use the asset while adhering to the lease terms and maintaining the asset as agreed.

The lessor-lessee relationship is governed by a lease agreement that outlines the rights, responsibilities, and obligations of each party over the lease term. Lessors must ensure the asset is maintained and compliant with legal standards, while lessees must use the asset responsibly and make timely rental payments. Both parties benefit from understanding their respective roles and adhering to the terms of the lease agreement to ensure a smooth and mutually beneficial leasing experience.

For lessors, proper maintenance, clear communication, and legal compliance are key to successful asset management. For lessees, adhering to lease terms, maintaining the asset, and fulfilling financial obligations are crucial for maintaining good standing and potentially leveraging future leasing opportunities.

Whether dealing with operating leases, finance leases, or other types of leasing arrangements, both lessors and lessees should carefully consider the financial, legal, and operational implications. Consulting with legal and financial professionals can help both parties navigate the complexities of lease agreements and avoid potential disputes, ensuring a productive and compliant leasing relationship.

Frequently Asked Questions

Who is a lessor and a lessee.

A lessor is the owner of an asset that is leased or rented out to another party, while a lessee is the party that obtains the right to use the leased asset from the lessor for a specified period in exchange for periodic rental payments.

Is the lessor the owner?

Yes, the lessor is the owner of the asset that is being leased. The lessor retains ownership of the asset and grants the lessee the right to use it for a specified term.

Is a lessee another name for a landlord?

No, a lessee is not another name for a landlord. The lessee is the tenant who rents or leases the asset. The landlord, also known as the lessor, is the owner who rents out the property to the lessee.

Is the lessor the buyer or seller?

In a lease agreement, the lessor is neither the buyer nor the seller. The lessor is the owner of the asset who leases it out to the lessee. However, in the context of a lease-purchase agreement, the lessor could be considered the seller if the lessee has the option to buy the asset at the end of the lease term.

What is another word for lessor?

Another word for lessor is "landlord." Both terms refer to the party that owns and rents out property or assets to a lessee or tenant.

What do you call someone who rents out property?

Someone who rents out property is called a "lessor" or "landlord." They are responsible for leasing the property to a tenant (lessee) in exchange for periodic rental payments.

Finding and Selecting the Best Tenant

Assignment and Consent Standards in Commercial Leases

Mar 6, 2020

Assignment provisions in commercial leases are heavily negotiated and very important to both landlords and tenants. This article presents a brief overview of the assignment provision in commercial leases, both office and retail.

Assignment provisions in commercial leases are heavily negotiated and very important to both landlords and tenants. When a tenant’s interest in a lease is assigned, the tenant is transferring its entire leasehold interest and 100% of the leased premises to a third party for the entire remaining term of the lease. For the tenant, the assignment provision represents a potential exit strategy, dependent of course on the local market, and increased flexibility for future needs. For the landlord, the assignment offers greater security for its revenue stream and hopefully the avoidance of a tenant bankruptcy or default while keeping its building occupied. The tenant’s desire for flexibility and the landlord’s need for control is where the negotiations are focused. This article presents a brief overview of the assignment provision in commercial leases, both office and retail, with particular attention on the laws of Maryland, Virginia and the District of Columbia. The landlord’s standard for providing consent to a request to an assignment will be reviewed, and we will conclude by offering suggested language.

What If The Lease Does Not Contain An Assignment Provision?

The law traditionally favors the free alienation of property. Therefore, under the laws of almost every state, if the lease is silent on whether the landlord’s consent to an assignment is required, then the commercial tenant has the right to assign its interest. This is true in Maryland, Virginia and the District of Columbia. Given this baseline, almost every lease form will have a detailed provision setting forth the assignment process. Note also, however, that in most states it is also enforceable for a commercial lease to have an outright prohibition against assignments. Such a provision would likely be a non-starting deal point for most sophisticated tenants.

What Does Reasonable Mean?

If a lease simply provides that the tenant requires landlord’s consent to an assignment, but does not include the standard for giving or withholding that consent, then in many states the implied standard is that the landlord’s consent may not be unreasonably withheld. Historically this was the minority view, with the historical rule allowing the landlord to withhold consent for any reason. The implied duty of reasonableness is now more the norm as more states adopt this position when presented with the issue. There is express case law establishing this rule in Maryland, and most courts in Virginia and Washington, DC will imply such a covenant of good faith and fair dealing. Most states, though, do allow a landlord the sole right to grant or withhold its consent if the lease clearly expressly provides, and in Maryland the lease must specifically state that the landlord’s consent may be granted or withheld in the sole and absolute subjective discretion of the landlord. Again though, a sophisticated tenant with any leverage should never agree to such a provision.

Most negotiated leases will instead contain a provision requiring that landlord’s consent to an assignment is required, but such consent will not be unreasonably withheld. The tenant will likely also try to include landlord’s obligation to not unreasonably delay or condition its consent. A short clause without further defining what constitutes “reasonableness” generally favors the tenant, and landlords typically prefer including specific standards as to the criteria it can consider when reasonably deciding whether or not to consent to an assignment. Without such specificity, defining “reasonable” is difficult as the landlord and tenant clearly will have differing viewpoints and it may be left as a factual question to be decided in litigation. The typical definition (set forth in the Restatement (Second) of Property) would be that of a reasonably prudent person in the landlord’s position exercising reasonable commercial responsibility.

Absent a detailed provision listing the criteria a landlord can consider when reasonably reviewing a request to assign, a landlord is typically found to be considered reasonable if it considers certain general broad factors. First, the landlord reviews the assignee’s proposed use. In a retail setting, the landlord will be concerned whether the proposed use fits with the existing center and/or violates any existing exclusives or insurance requirements. In an office setting, the landlord might review the expected traffic and wear and tear on the building. Second, the landlord will consider the creditworthiness of the assignee. The landlord (and the assignor) will want to be confident that the assignee is capable of performing tenant’s obligations under the lease and a large creditworthy tenant increases the value of the asset. The assignor might argue that a strict financial test (such as a minimum net worth, for example) is unfair since the assignor is likely not being released upon the assignment and the landlord can still pursue the assignor in the event of a default. Third, the landlord will review the experience and history of the assignor. As mentioned above, landlords instead prefer a detailed list setting forth the many factors that they can include as part of reasonably reviewing a request for a lease assignment.

Without further establishing the criteria, the landlord puts itself at risk of a challenge by the tenant that a denial of a consent is unreasonable.

In defining “reasonable,” courts typically do not allow a landlord to deny or condition consent to an assignment based purely on economic reasons where the landlord results in substantially increasing what it was entitled to under the lease. In Washington, DC, there is well established case law holding that it is unreasonable for a landlord to withhold consent solely to extract an economic concession or improve its economic position. For example, a court would not consider it reasonable for a landlord to condition its consent on the assignee paying a greatly increased rent. Instead, as discussed below, landlords should look to protect their interests in a market of increasing rents by providing for either the sharing of excess rentals or a right to recapture.

What Are Typical Provisions In an Assignment Clause?

As discussed above, tenants generally prefer a short assignment provision simply requiring the landlord to not unreasonably withhold, condition or delay its consent to an assignment. But most leases are drafted by landlords, and over the years the assignment provisions have evolved to contain many typical provisions in addition to further defining “reasonableness,” including the following below.

• Sharing of Excess Rents. Since many states do not permit a landlord to condition its consent on improving its economic position (e. g. , by increasing the rent), most leases instead contain a provision where the landlord is entitled to all or a portion of the profits. The profits may mean increased rent, or it may even be construed more broadly to consider the value of the location in a sale of the tenant’s business. The landlord’s argument is that it doesn’t want the tenants competing in the real estate market. The tenant should push back here, and certainly try to lower the percentage shared, carve out any consideration received in the sale of tenant’s business, and only share profits after all of the tenant’s reasonable costs incurred in connection with the assignment were first deducted.
• Corporate Transfers. Since a purchase of the entity constituting tenant is likely not deemed an assignment under the law, most leases make clear that any such corporate sale, including the sale of either a controlling interest in the stock or substantially all of the assets of the tenant, is deemed an assignment for purposes of the lease. The tenant should carve out permitted transfers for typical mergers and acquisitions under certain conditions, and also carve out routine transfers of stock (or other ownership interests) between existing partners or for estate planning purposes. The landlord will likely accept a permitted transfer concept provided they receive adequate notice and the successor entity succeeds to all of the assets of the original tenant with an acceptable net worth.
• Assignment Review Fee. Most landlords include in their form lease the requirement that the tenant reimburse them for legal and administrative expenses incurred in reviewing the request for consent and preparing the assignment. The tenant clearly wants to keep these fees reasonable and in keeping with the local market.
• Recapture Rights. Landlords like to include the express right to recapture the premises in the event the tenant comes to it to request a consent for an assignment. A recapture clause allows the landlord to terminate the lease if market rents have increased or if it needs the space for another use. Sophisticated tenants should push back here as much as leverage allows, try to limit the time periods, and if nothing else try for the right to nullify the recapture by rescinding its request for the consent.
• Tenant’s Remedy. To protect themselves from claims for damages from the tenant if the landlord withholds its consent to a requested assignment, landlords often include a provision where the tenant waives its rights to monetary damages in such a situation and can only seek injunctive relief. The tenant should try to delete this provision, or at least, if leverage permits, provide for the right to seek damages if the landlord is subsequently found to have acted in bad faith.

Assignment provisions are heavily negotiated and both the commercial landlord and tenant need to be advised to the applicable local law and know the market for a comparable transaction. ( Note: The author represents office and retail landlords and tenants throughout Virginia, Maryland and the District of Columbia.) Sample reasonableness provisions for both office and retail uses are copied below for reference.

Retail Lease

Landlord and Tenant agree, by way of example and without limitation, that it shall be reasonable for Landlord to withhold its consent if any of the following situations exist or may exist: (i) In Landlord’s reasonable business judgment, the proposed assignee lacks sufficient business experience to operate a business of the type permitted under this Lease and to a quality required under this Lease; (ii) The present net worth of the proposed assignee is lower than that of Tenant’s as of either the date of the proposed assignment or the date of this Lease; (iii) The proposed assignment would require alterations to the Premises affecting the Building’s systems or structure; (iv) The proposed assignment would require modification to the terms of this Lease, or would breach any covenant of Landlord in any other lease, insurance policy, financing agreement or other agreement relating to the Shopping Center, including, without limitation, covenants respecting radius, location, use and/or exclusivity; (v) The proposed assignment would conflict with the primary use of any existing tenant in the Shopping Center or any recorded instrument to which the Shopping Center is bound; and/or (vi) The proposed assignment or subletting would result in a reduction in the Rent collected by Landlord during any portion of the term of this Lease.

Office Lease

Without limitation as to other reasonable grounds for withholding consent, the parties hereby agree that it shall be reasonable under this Lease and under any applicable law for Landlord to withhold consent to any proposed Transfer where one or more of the following apply: (i) The Transferee is of a character or reputation or engaged in a business which is not consistent with the quality of the Building; (ii) The Transferee intends to use the Premises for purposes which are not permitted under this Lease; (iii) The Transferee is a governmental agency; (iv) The Transfer occurs prior to the first anniversary of the Lease Commencement Date; (v) The Transferee has a net worth of less than $10,000,000.00; (vi) The proposed Transfer would cause a violation or trigger a termination right of another lease for space in the Building; or (vii) Either the proposed Transferee, or any person or entity which directly or indirectly, controls, is controlled by, or is under common control with, the proposed Transferee, (i) occupies space in the Building at the time of the request for consent, or (ii) is negotiating with Landlord to lease space in the Building at such time, or (iii) has negotiated with Landlord during the six (6)-month period immediately preceding the Transfer Notice.

Reprinted with permission from the March edition of the Commercial Leasing Law & Strategy© 2020 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or [email protected] .

• John G. Kelly

Related Practices Areas

• Commercial Leasing
• Real Estate

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• Bank & Lender Services
• Real Estate Development & Investment
• Small, Emerging & Growing Businesses

ASSIGNMENT OF LEASE BY LESSEE

Read also: PERSONS DISQUALIFIED TO BECOME LESSEES

The lessee cannot assign the lease without the consent of the lessor.

The assignment of a lease by the lessee involves a transfer of rights and obligations pertaining to the contract; hence, the consent of the lessor is necessary.

There arises the new juridical relation between the lessor and the assignee who is converted into a new lessee.

C an a lessee assign the lease of the house to another, without the consent of the lessor?

No, unless there is a stipulation to that effect. 

The law says:

“The lessee cannot assign the lease without the consent of the lessor, unless there is a stipulation to the contrary.”

In the case of Josie Go Tamio v.  Encarnacion Ticson ( G.R. NO. 154895, November 18, 2004) , the Court explained that, the objective of the law in prohibiting the assignment of the lease without the lessor’s consent is to protect the owner or lessor of the leased property. In the case of cession or assignment of lease rights on real property, there is a novation by the substitution of the person of one of the parties – – the lessee. The personality of the lessee, who dissociates from the lease, disappears; only two persons remain in the juridical relation – – the lessor and the assignee who is converted into the new lessee.

Thus, there arises the new juridical relation between the lessor and the assignee who is converted into a new lessee.

Hence, the lessee cannot assign the lease without the consent of the lessor (creditor), unless there is a stipulation granting him that right.

Alburo Alburo and Associates Law Offices  specializes in business law and labor law consulting. For inquiries, you may reach us at [email protected], or dial us at (02)7745-4391/0917-5772207.

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Assignment And Assumption Of Lease: Definition & Sample

Jump to section, what is an assignment and assumption of lease.

An assignment and assumption of lease is a legal real estate document that allows one party to transfer rights and obligations of a lease to another party. Often used in real estate transactions and mortgage lending, the assignment and assumption of lease agreement requires the landlord to consent to move forward.

An assignor may include an assumption agreement to provide legal protection by transferring obligations to the new tenant. For example, if a tenant defaults on a mortgage or stops paying rent, the original seller is no longer liable. Assignment and assumption of lease agreements cover terms like who is newly responsible for the lease and the landlord's contract for this agreement.

Common Sections in Assignment And Assumption Of Leases

Below is a list of common sections included in Assignment And Assumption Of Leases. These sections are linked to the below sample agreement for you to explore.

Assignment And Assumption Of Lease Sample

Reference : Security Exchange Commission - Edgar Database, EX-10.2 2 d425646dex102.htm ASSIGNMENT AND ASSUMPTION OF LEASE , Viewed October 18, 2021, View Source on SEC .

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Lessor vs Lessee

The two main parties in a lease agreement

What is Lessor vs Lessee?

There are two main parties in a lease agreement, and every finance professional needs to know how to differentiate between the lessor vs lessee. A lease is a contractual arrangement where one party, called the lessor, provides an asset for use by the other party, referred to as the lessee, based on periodic payments for an agreed period. The lessee pays the lessor for the usage of the asset or property.

Leasing an asset is often a more economical option than purchasing the actual asset because it requires a much lower cash outlay. Lessor vs lessee – the arrangement between these two parties is entered into a lease agreement , which is a contractual document signed by both parties.

Roles of Lessor vs Lessee

There are two principal parties in a lease agreement.

The lessor is the legal owner of the asset or property, and he gives the lessee the right to use or occupy the asset or property for a specific period. 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. He must also be compensated for any losses incurred during the contract due to damage or misuse of the asset in question. If the asset is sold, the lessor must authorize such a transaction and is entitled to receive any financial gains resulting from the sale.

Although the lessor retains ownership of the asset, he enjoys reduced rights to the asset during the course of the agreement. One of these limitations is that the owner, given his limited access to the asset, may only gain entry with the permission of the lessee. He must inform the lessee of any maintenance to be done on the asset or property prior to the actual time of the visit.

However, if the lessee causes damage to the asset, or uses the asset to commit illegal activities, then the lessor reserves the right to evict the lessee or otherwise terminate the lease agreement, without notice. On the expiry of the contract period and depending on the condition of the asset, the asset or property is returned to the lessor, although the lessee may have an option to purchase the asset.

The lessee is the party who gets the right to use an asset for a specific period and makes periodic payments to the lessor based on their initial agreement. The length of the lease period often depends at least partially on the type of asset or property. For example, the lease of land to set up a manufacturing plant may be for a longer period than the lease of equipment or a vehicle.

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. Any damages to the property must be repaired before the expiry of the contract. If the lessee fails to make needed repairs or replace any broken fixtures, the lessor has the right to charge the amount of the repairs to the lessee as per the lease agreement.

Lessor vs Lessee Agreement

The lease agreement is a contract between the lessor vs lessee for the use of the asset or property. It outlines the terms of the contract and sets the legal obligations associated with the use of the asset. Both parties are signatories to the agreement and are required to abide by its rules. If either of the parties contravenes the conditions of the lease agreement, the contract can be terminated.

For example, if the lessee conducts illegal activities on the premises of the lessor, the latter holds the right to cancel the contract and evict the lessee from the property. Some lease agreements include the option of the lessee buying the leased asset or property at the end of the lease period.

Types of Lease Agreements

The following are three types of lease agreements:

Capital Lease

A capital lease, also referred to as a finance lease, is a lease in which the lessee acquires full control and ownership of the asset and is responsible for all maintenance and other costs associated with the asset. GAAP requires that this type of lease agreement be recorded on the lessee’s balance sheet as an asset with a corresponding liability.

Any interest is recorded separately in the income statement. The lessee assumes both risks and benefits of the ownership of the asset. A capital lease is a long-term lease that spans most of the asset’s useful life.

Operating Lease

An operating lease is a type of lease where the lessor retains all the benefits and responsibilities associated with ownership of the asset. The lessor is in charge of covering everyday operating expenses (such as buying ink for a printer). The lessee uses the asset or equipment for a fixed portion of the asset’s life and does not bear the cost of maintenance. Unlike in a capital lease agreement, the lessee does not record the asset on the balance sheet.

Sale and Leaseback

A sale and leaseback is a type of agreement where one party purchases an asset or property from another party, and immediately leases it to the selling party. The seller becomes the lessee, and the company that purchases the asset becomes the lessor.

This type of agreement is implemented based on the understanding that the seller will immediately lease back the asset from the buyer, subject to an agreed payment rate and period of payment. The buyer in this type of transaction may be a leasing company, finance company, insurance company, individual investor, or institutional investor.

Other Resources

Thank you for reading CFI’s guide to Lessor vs Lessee. To keep advancing your career, the additional free CFI resources below will be useful:

• Prepaid Lease
• Lease Accounting
• Property, Plant & Equipment (PP&E)
• Projecting Balance Sheet Items
• See all accounting resources

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The Oil and Gas Report

Saving the Best for Last – What Is All That Stuff at the End of My Lease?

On this blog, we have posted our complete Fee Lease 101 Series covering many of the standard fee oil and gas lease provisions from the granting clause to the pooling clause. However, there is typically a group of clauses towards the end of the lease form that appear to be the left-over clauses. These clauses include the assignment clause, proportionate reduction clause, warranty clause, surrender or release clause, and preferential right to purchase or option clause. They can have important ramifications on the relationship of the lessor and lessee and status of the lease and, accordingly, are discussed below.

I.      Assignment Clause

The assignment clause governs how the lessor and lessee may assign their respective interests. It may contain a restraint on the lessee’s power to assign the lease in whole or in part without the lessor’s consent. It may also contain a restraint on the minimum acres or minimum interest that may be assigned, such as “no less than forty acres” or “no less than the lessee’s entire undivided interest.” This restraint on assigning/alienation by the lessee is generally allowed; however, it will be strictly construed.

To avoid a claim that the clause is an unreasonable restraint on alienation, contemporary leases typically authorize assignments by either the lessor or lessee, in whole or in part, but will often include conditions to the assignment. For instance, it may state that lessee will not recognize a change in the lessor’s ownership until it receives an original or authenticated copy of the assignment. It may allow a partial assignment by the lessor, but will require that the assignment cannot increase the lessee’s obligations under the lease, such as drilling offsetting wells, protection of drainage, requiring separate measuring, or installation of separate tanks.

Although often the intent of the assignor, it is important that the assignment clause provides that the lessor relieves the lessee of any further obligations concerning the interest assigned. 1 The assignor does not want to assign the interest and thereafter be stuck with the royalty payments if the assignee fails to pay the lessor. If a partial assignment of the lessee’s interest is allowed, a provision should be included that deals with the apportionment of rentals and royalties.

The following example assignment clause addresses all of the above requirements:

Ownership Changes. The interest of either Lessor or Lessee hereunder may be assigned, devised or otherwise transferred in whole or in part, by area and/or by depth or zone, and the rights and obligations of the parties hereunder shall extend to their respective heirs, devisees, executors, administrators, successor and assigns. No change in Lessor’s ownership shall have the effect of reducing the rights or enlarging the obligations of Lessee hereunder, and no change in ownership shall be binding on Lessee until 60 days after Lessee has been furnished the original or duly authenticated copies of the documents establishing such change of ownership to the satisfaction of Lessee or until Lessor has satisfied the notification requirements contained in Lessee’s usual form of division order. In the event of death of any person entitled to rentals or shut-in royalties hereunder, Lessee may pay or tender such rentals or shut-in royalties to such persons or to their credit in the depository, either jointly, or separately in proportion to the interest which each owns. If Lessee transfers its interest hereunder in whole or in part Lessee shall be relieved of all obligations thereafter arising with respect to the transferred interest, and failure of the transferee to satisfy such obligations with respect to the transferred interest shall not affect the rights of Lessee with respect to any interest not so transferred. If Lessee transfers a full or undivided interest in all or any portion of the area covered by this lease, the obligation to pay or tender rentals and shut-in royalties hereunder shall be divided between Lessee and the transferee in proportion to the net acreage interest in this lease then held by each. 2

II.       Proportionate Reduction 3

The proportionate reduction clause is also referred to as the lesser interest clause. It provides for reduction of rentals and royalties owed to the lessor in the event the lessor owns less than the full mineral estate. A typical proportionate reduction clause will provide:

In case said Lessor owns a lesser interest in the above described land than the entire and undivided fee simple estate therein, then the rentals and royalties herein provided shall be paid to Lessor only in the proportion that his interest bears to the whole and undivided fee.

However, the above example does not differentiate between the proportionate reduction of rentals and proportionate reduction of royalties. It focuses on the entire leased lands. What is the result if the lease covers a 640-acre section, the lessor owns 100% of the mineral estate in the W/2 of the section, 50% of the mineral estate in the E/2 of the section, and the well is located on the E/2? The lessor’s proportionate interest is 75% [(100% x 320/640) + (50% x 320/640)]. The lessor would not only receive 75% of the rental, but also 75% of the royalty even though the well is located on the lands in which the lessor only owns a 50% mineral interest.

The following example makes a distinction between rentals and royalties:

If Lessor owns less than the full mineral estate in all or any part of the leased premises, payment of rentals, royalties, and shut-in royalties hereunder shall be reduced as follows: (a) rentals shall be reduced to the proportion that Lessor’s interest in the entire leased premises bears to the full mineral estate in the leased premises, calculated on a net acreage basis; and (b) royalties and shut-in royalties for any well on any part of the leased premises or lands pooled therewith shall be reduced to the proportion that Lessor’s interest in such part of the leased premises bears to the full mineral estate in such part of the leased premises.

III.       Warranty Clause 4

The warranty clause provides a warranty of title by the lessor with respect to the interest described in the granting clause. Additionally, the warranty clause provides the basis for applying the doctrine of after-acquired title in the event the lessor acquires an interest in the leased premises after giving the lease. The following are two examples of warranty clauses:

• Lessor hereby warrants and agrees to defend the title to the land herein described and agrees that the Lessee, at its option may pay and discharge in whole or in part any taxes, mortgages, or other liens existing, levied, or assessed on or against the above described lands, and in the event it exercises such option, it shall be subrogated to the rights of any holder or holders thereof and may reimburse itself by applying the discharge of any such mortgage, tax, or other liens, to any royalty or rental accruing hereunder.
• Lessor hereby warrants and agrees to defend title conveyed to Lessee hereunder, and agrees that the Lessee at Lessee’s option may pay and discharge any taxes, mortgages or liens existing, levied or assessed on or against the leased premises. If Lessee exercises such option, Lessee shall be subrogated to the rights of the party to whom payment is made, and, in addition to its other rights, may reimburse itself out of any royalties or shut-in royalties otherwise payable to Lessor hereunder. In the event Lessee is made aware of any claim inconsistent with Lessor’s title, Lessee may suspend the payment of royalties and shut-in royalties hereunder, without interest, until Lessee has been furnished satisfactory evidence that such claim has been resolved. 5

The second warranty clause above allows the lessee to suspend payments to the lessor without interest in the event of a title dispute. However, a lessee should never suspend rental payments even if there is a title dispute. Failure to pay rentals could be fatal if the suspension is later determined to be unjustified.

As set forth in the above examples, the warranty clause often will contain a subrogation provision pertaining to a superior lien existing prior to the execution of the lease. To protect the lessee from the lease being extinguished if the superior lien is foreclosed, the clause authorizes the lessee to satisfy any liens and be subrogated to the rights of the lienor. The clause may vary in the types of claims or obligations the lessee is authorized to satisfy, including mortgages, deeds of trusts, taxes, assessment, charges, and encumbrances. Additionally, the clause may address whether the lessee may satisfy the claim or obligation prior to maturity thereof; and whether the lessee is authorized to withhold payments to the lessor for rentals, royalties, or other sums in satisfaction of the claim to reimbursement.

The warranty clause must be read in relationship to the granting clause and proportionate reduction clause. If the lessor owns less than 100% of the mineral interest, a granting clause that only describes the lands, but not the interest, is technically a breach of the warranty clause, but the proportionate reduction clause acts to proportionately reduce the lessor’s interest and the rental and royalties owed. If the granting clause describes the lessor’s percentage mineral interest in the lands, there is no breach of warranty, but there may be confusion as to the applicability of the proportionate reduction clause – is the lessor entitled to 100% of the rentals and royalties, i.e. not further proportionately reduced.

Cases have held that the warranty in the lease does not warrant the title of the lessor, it actually warrants title to the lessee. The warranty clause can be used to make a claim for a breach of warranty if the mineral interest covered by the lease is subject to an interest carved out of the mineral estate. For example, if prior to execution of the lease, the lessor’s mineral interest is subject to a non-participating royalty interest, it could be argued that the warranty clause, in some cases, results in the lessor’s royalty interest being reduced by the amount of the non-participating royalty interest. 6

Many lessors will strike out or delete the warranty clause. As discussed above, legitimate reasons exist for using this clause. If the lessor insists on deleting the warranty clause, the lessee should at least propose one of the options for protection: make it a special warranty (“by, through and under”); limit the damages for a breach of warranty to money paid for the bonus, rentals, and royalties; or have the lessor execute an indemnifying division order in the event of production attributable to the leased premises. 7 However, even if stricken, some courts have held that a warranty of marketable title is implied by law by use of the words “grant” or “convey” in the granting clause.

IV.       Surrender or Release Clause 8

The surrender or release clause was originally included in the “or” form lease to relieve the lessee of the obligations to either drill or pay rentals by allowing the lease to be surrendered back to the lessor. In contrast, the “unless” form lease permits a lessee to extinguish its obligations by merely failing to perform the obligation, i.e. lease will terminate unless rental is paid. However, a surrender clause is also useful in an “unless” form lease when the lessee desires to surrender only a portion of the lease. Following are two examples of a surrender clause:

• Lessee may, at any time and from time to time, deliver to Lessor or file of record a written release of this lease as to a full or undivided interest in all or any portion of the area covered by this lease or any depths or zones thereunder, and shall thereupon be relieved of all obligations thereunder arising with respect to the interest so released. If Lessee releases less than all of the interest or area covered hereby, Lessee’s obligation to pay or tender rentals and shut-in royalties shall be proportionately reduced in accordance with the net acreage interest retained hereunder.
• Lessee may at any time surrender or cancel this Lease in whole or in part by delivering or mailing such release to the Lessor, or by placing the release of record in the County where said land is situated. If this Lease is surrendered or cancelled as to only a portion of the acreage covered hereby, then all payments and liabilities thereafter accruing under the terms of this Lease as to the portion cancelled, shall cease and terminate, and any rentals thereafter paid may be apportioned on an acreage basis, but as to the portion of the acreage not released the terms and provisions of this Lease shall continue and remain in full force and effect for all purposes.

Of course, there are many variants of the surrender clause. As set forth in the above examples, a surrender clause may require that written notice be provided to the lessor and/or recording of the release. In some cases, the clause requires the notice be given at some particular date or after certain events have occurred (such as “after production is achieved”) or the surrender is not effective until some particular date after giving notice (such as “the surrender shall become effective 30 days after delivery of the release to Lessee”). The clause may also require a payment as a condition to the surrender.

As to partial surrenders, as provided in the examples above, if the lessee releases part of the lease, the lessee is relieved of all obligations concerning the released part, and rentals and shut-in royalties are proportionately reduced according to the amount of acreage released. However, some clauses specifically provide that certain obligations, including payment of rentals or royalties, will not be affected by a partial surrender. If a partial surrender is authorized, the size of the surrendered or retained lands may be addressed in the clause, i.e. “not less than ten (10) acres;” “contiguous;” or “any legal subdivisions thereof.” Including the phrases “at any time or times” or “may at any time, or from to time to time” clearly evidence that successive partial surrenders by the lessee are allowed. The lessee should include a provision that the partially surrendered lands shall remain subject to the easements and right-of-way provided in the lease for the lessee’s operations. Additionally, restrictions on the lessor’s or its subsequent lessee’s use of the surrendered land should be included stating that the lessor shall not interfere with the original lessee’s operations and requiring adequate set-backs from the exterior boundary of the lands retained or any well drilled by the original lessee.

V.       Preferential Rights to Purchase and Options 10

To protect the lessee, particularly with the advent of the short primary terms contained in contemporary leases, preferential rights to purchase and options to extend the primary term or renew the lease have been added to the lease. The following is a preferential right to purchase a new lease clause:

If during the term of this lease (but not more than 20 years after the date hereof) Lessor receives a bona fide offer from any party to purchase a new lease covering all or any part of the lands or substances covered hereby, and if Lessor is willing to accept such offer, then Lessor shall promptly notify Lessee in writing of the name and address of the offeror, and of all pertinent terms and conditions of the offer, including any lease bonus offered. Lessee shall have a period of 30 days after receipt of such notice to exercise a preferential right to purchase a new lease from Lessor in accordance with the terms and conditions of the offer, by giving Lessor written notice of such exercise. Promptly thereafter, Lessee shall furnish to Lessor the new lease for execution, along with a time draft for the lease bonus conditioned upon execution and delivery of the lease by Lessor and approval of the title by Lessee, all in accordance with the terms of said draft. Whether or not Lessee exercises its preferential right hereunder, then as long as this lease remains in effect any new lease from Lessor shall be subordinate to this lease and shall not be construed as replacing or adding to Lessee’s obligations hereunder. 11

The twenty year limitation is to avoid a violation of the rule against perpetuities in some states. This provision provides that the new lease is subordinate to the old lease to avoid any question about the status of the new lease while the old lease is still in effect.

An option to extend the primary term may provide for the lease to be extended for a specified period of time upon payment of a specified consideration. For instance, the following is an option to extend the primary term:

Lessee is hereby given the option to extend the primary term of this lease for an additional Two (2) year(s) from the expiration of the original primary term hereof. This option may be exercised by Lessee at any time during the original primary term by paying the sum of One Hundred and 00/100 Dollars ($100.00) per net mineral acre to Lessor or the credit of Lessor mailed to Lessor at the above address. This payment shall be based upon the number of net mineral acres then covered by this lease and not at such time being maintained by the other provisions hereof. If, at the time this payment is made, various parties are entitled to specific amounts according to Lessee’s records, this payment may be divided between said parties and paid in the same proportion. Should this option be exercised as herein provided, it shall be considered for all purposes as though this lease originally provided for a primary term of Five (5) years.

A lease may also contain an option to renew the lease. Courts have differed on whether there is a distinction between “renew” or “extend.” In an Ohio decision, the court held that the clause “Lessor grants Lessee an option to extend or renew under similar terms a like lease” provided the lessee with two options: (1) to extend the lease on the same terms as the existing lease; or (2) to renegotiate for a renewal “like lease” on similar terms. The court reasoned that the terms “renew” and “extend” are distinct terms. 12

In our Fee Lease 101 Series, we have covered most of the standard fee oil and gas lease clauses. As discussed above, these “left-over” provisions can affect the lessor’s and lessee’s, and their successor and assigns, rights, interests, and obligations and the status of the lease. A caveat for this article, and all our Fee Lease 101 Series articles, in interpreting any lease provision, care must be used in examining the specific language of the provision and the case law of the jurisdiction must be understood and applied. In order to avoid unintended consequences, the same caveat applies to drafting any lease provision.

1 See Pennaco Energy v. KD Co. LLC, 2015 WY 152, ¶ 19 (2015) (Finding, “Among the covenants [obligations] the original lessee-assignor retains after assignment of its interest are those requirement payments of rentals and/or royalties and restoration of the surface to its original condition once production activities have ceased.”). 2 Thomas W. Lynch, The “Perfect” Oil and Gas Lease (An Oxymoron), 40 Rocky Mtn. Min. L. Inst. 3-1, § 3.10 (1994). 3 See, generally, id. § 3.09. 4 See, generally, 4-6 Williams & Meyers, Oil and Gas Law § 685.1. 5 See, generally, Lynch at fn. 3, § 3.15. 6 Id. 7 Milam Randolph Pharo & Gregory R. Danielson, The Perfect Oil and Gas Lease: Why Bother!, 50 Rocky Mtn. Min. L. Inst. 19-29 (2004). 8 See, generally, 4-6 Williams & Meyers, Oil and Gas Law § 680. 9 The use of the terms “surrender” or “release” are used interchangeably to describe this clause. For purposes of this article, we will use the term “surrender”. 10 See, generally, 4-6 Williams & Meyers, Oil and Gas Law § 697.6. 11 See, generally, Lynch at fn. 3, § 3.17. 12 Kenney v. Chesapeake Appalachia, 2015 Ohio 1278 (Ohio Ct. App. 2015); Eastman v. Chesapeake Appalachia, 754 F.3d 356 (6th Cir. 2014).

Lessor vs Lessee: Understanding The Difference

Leasing agreements are a fundamental aspect of residential and commercial real estate transactions and understanding the difference between lessor vs lessee can be a challenge. Understanding what is a lessee vs what is a lessor as well as their different roles is fundamental, regardless of whether you are renting a residential apartment, leasing office space, or entering into an industrial lease agreement. While the terminology might initially seem complex, demystifying these roles can significantly benefit both parties in a leasing transaction.

At Leasecake , our expertise lies in assisting tenants with retail and commercial leases , particularly in managing their lease agreements and location data. In this article, we’ll primarily explore scenarios relevant to these sectors. However, it’s important to note that the foundational lessor and lessee meaning and definition remains consistent across all types of leases. Keep this universality in mind as we delve into the specifics tailored to retail and commercial leasing contexts.

The Difference Between Lessor vs Lessee

Let’s start by defining what is a lessor vs what is a lessee. Understanding these terms is essential for anyone navigating lease agreements, whether for residential, commercial, or equipment leasing purposes. Let’s start with a basic lessee vs lessor definition:

Lessor : The best way to define lessor is that, its essentially the property owner or landlord, grants the right to occupy or use the property under the terms of a lease agreement. This arrangement allows a lessor to achieve a return on their investment without relinquishing ownership of their asset. The lessor’s role is crucial in making property or equipment available for temporary use, often providing a viable alternative for those not looking to purchase outright.

Lessee : The simplest way to define lessee is that it’s the tenant or renter. The lessee secures the right to use the property in exchange for regular rental payments. For lessees, leasing presents a manageable solution to access property or equipment temporarily, avoiding the financial commitment required for purchasing. The lessee’s benefit lies in the flexibility and financial ease that leasing offers, especially when purchasing isn’t feasible or preferred.

To better illustrate the lessor vs lessee relationship, let’s consider a few real-life examples:

Residential Leasing: In an apartment rental scenario, the landlord (lessor) owns the property and leases it out to tenants (lessees). The tenants have the right to occupy the apartment for a specified period and pay rent to the landlord.

Commercial Leasing: A business owner (lessee) may lease office space or retail premises from a property owner (lessor). The lessee pays rent to the lessor and has the right to use the space for their business operations.

Equipment Leasing: A manufacturing company (lessee) may lease heavy machinery or equipment from a leasing company (lessor). The lessee pays regular lease payments to the lessor and can use the equipment for their operations during the lease term.

These examples underscore the fundamental relationship between lessor and lessee , delineating how the lessor provides an asset for use, and the lessee compensates with payment, adhering to the lease’s duration. Grasping the essence of the lessor definition and the lessee definition establishes a solid foundation for understanding lease agreement dynamics and responsibilities.

Rights and Responsibilities of the Lessee vs Lessor

Understanding the rights and responsibilities of both the lessor and lessee is key to a successful partnership. Let’s dig into it.

Lessor’s Rights and Responsibilities

Collect Rent: The lessor has the right to collect rent from the lessee as specified in the lease agreement.

Property Maintenance: The lessor is responsible for maintaining the property in a habitable condition and making necessary repairs (unless otherwise specified).

Access to Property: The lessor typically retains the right to access the property for inspections or repairs with reasonable notice.

Breaking Down the Lease Agreement

A lease agreement outlines the terms and conditions, clarifying the lessor vs lessee meaning in practical terms. While the specifics may vary depending on the type of lease (residential, commercial, industrial), some common elements typically found in a lease agreement include:

Duration of Lease: This specifies the length of time the lessee has the right to occupy the property. It could be a fixed term (e.g., one year) or a periodic tenancy (e.g., month-to-month). Most retail leases are a 10 year term with 5 year renewal options.

Rental Payments: The lease agreement will specify the amount of rent due from the lessee to be paid to the lessor, as well as specifying the frequency of payments, and any penalties for late payments.

Property Description and Use: Details about the property being leased and any restrictions on its use will be outlined in the agreement.

Maintenance and Repairs: Divides responsibilities for property maintenance and repairs between the lessor and lessee. It’s crucial to clarify these obligations to avoid disputes. Before signing a lease, ensure the responsibilities for maintaining and repairing every aspect of the property are explicitly stated. Vague language in this area can lead to unexpected expenses.

Security Deposit: Many lease agreements require the lessee to provide a security deposit upfront, which serves as a form of protection for the lessor against damages or unpaid rent. Be sure to maintain your own records of this deposit as well as noting when it will be returned to you.

Termination and Renewal: Procedures for terminating the lease and options for renewal should be clearly defined in the agreement. Renewals for commercial and retail spaces can begin 2 years in advance of the actual termination date, so stay prepared and on top of your dates.

Lessee’s Rights and Responsibilities

Occupancy: The lessee has the right to occupy the property as outlined in the lease agreement.

Payment of Rent: The lessee is responsible for paying rent on time and adhering to any payment terms specified.

Property Care: The lessee must take reasonable care of the property and avoid causing damage beyond normal wear and tear. The lessee may also be responsible for specific maintenance as outlined in the lease agreement.

Lessee vs. Lessor Accounting Simplified

The recent shift in lease accounting standards has necessitated changes in how both lessors and lessees record leases on their financial statements, impacting their balance sheets and income statements significantly.

ASC 842: The introduction of ASC 842 , which supersedes ASC 840, brings significant changes for lessees, requiring them to list operating leases on their balance sheets. Lessors see nominal changes under this standard. For a detailed comparison between ASC 840 and ASC 842, refer to our specialized resource.

IFRS 16 : Similar to ASC 842, IFRS 16 mandates that lessees recognize all leases on their balance sheets, merging all leases into a single category that mirrors the finance lease under ASC 842. This standard also affects lessee income statements, while lessor accounting remains largely the same.

GASB 87 : Under GASB 87, lessors document a lease receivable and deferred inflow of resources at lease start, based on the present value of expected lease payments. Lessees, on the other hand, must record a lease liability and a corresponding lease asset at the beginning of the lease term, reflecting the right to use the property. The lease asset is amortized over the lease term or the asset’s useful life, adjusting for any initial payments or incentives.

These updates to lease accounting standards underscore the importance of both parties understanding their new documentation responsibilities to maintain compliance and transparency in financial reporting.

Common Misunderstandings and Disputes

Misunderstandings can arise from unclear definitions, underscoring the importance of a shared lessee and lessor meaning. Some common issues include:

Maintenance Responsibilities: Disputes may arise over who is responsible for certain maintenance tasks, especially if the lease agreement is unclear. Suppose there’s a leak in the roof of a leased property. The lessor may argue that it’s the lessee’s responsibility to fix it as per the lease agreement’s maintenance clause. Conversely, the lessee may claim that it’s the lessor’s responsibility since it’s a structural issue.

Rent Increases: Lessees may challenge rent increases they deem excessive or unjustified. The lessor decides to increase the rent significantly at the end of the lease term. The lessee may dispute the increase, claiming it’s unjustified or exceeds the market rate for similar properties in the area.

Security Deposit Returns: Disputes may occur regarding the return of the security deposit, particularly if there are disagreements about damages or cleaning fees. Upon the termination of the lease, the lessor may withhold a portion of the security deposit to cover what they deem excessive cleaning costs. The lessee may dispute this, arguing that the property was left in the same condition as when they moved in, and the cleaning fee is unwarranted.

Repairs and Upgrades : Imagine the lessee makes improvements to the property without obtaining prior approval from the lessor, assuming that they have the right to do so. However, the lessor could dispute this, claiming that any alterations to the property require their consent.

Navigating Lessee vs Lessor Challenges Effectively

Effective navigation of lessee vs lessor challenges hinges on understanding not just the lease terms but the deeper definition for lessor and lessee.

Read and Understand the Lease Agreement : Thoroughly review the lease agreement before signing and seek clarification on any ambiguous terms.

Document Everything : Keep records of all communications, payments, and property inspections to avoid disputes.

Seek Legal Advice if Necessary : If disputes escalate, consider seeking legal advice to understand your rights and options for resolution.

Negotiating Lease Terms

When negotiating lease terms, understanding who is the lessor in a lease agreement and who is the lessee shapes the negotiation dynamics. When entering into said negotiations, both parties should keep the following terms into consideration:

Rent: Negotiate fair rental rates based on market value and the condition of the property.

Maintenance Responsibilities: Clearly outline maintenance responsibilities to avoid confusion.

Lease Duration: Consider the length of the lease term and any options for renewal or early termination.

Non-Monetary Concessions: Explore non-monetary concessions that can add value to the lease agreement. These could include amenities, services, or lease enhancements that improve the overall quality of the space and enhance the tenant experience, including extended lease terms, tenant improvement allowances, marketing support and more.

By negotiating favorable terms and understanding legal jargon, both the lessor and lessee lessors and lessees can enter into lease agreements with confidence, knowing their rights and responsibilities.

Lease negotiation is a valuable skill, and we’ve written multiple articles on the topic. Check out our lease negotiation guide as a starting point to learn more.

Frequently Asked Questions Related to Lessee vs. Lessor

Q: what is lessor and what is a lessee.

A: In a lessee vs. lessor agreement, the lessor is the property owner, while the lessee is the individual or entity renting the property. The lessor definition encompasses landlords or property owners who grant lease rights.”

Q: What are the rights of a lessee?

A: In a lessee vs. lessor agreement, the lessee has the right to use the leased property or equipment for the duration of the lease agreement. In return, they are obligated to make timely lease payments as outlined in the agreement, typically maintaining the asset and making sure it is in good condition, barring normal wear and tear.

Q: What is the difference between a renter and a lessee?

A: The term “lessee” is more commonly used in formal or legal contexts, including both real estate and equipment leasing. “Renter” or “tenant” is often used in more casual, everyday language, typically referring to someone leasing residential property. Lessee, renter, and tenant have essentially the same meaning.

Q: What does lessee mean in law?

A: In legal terms, a lessee is a person or entity who enters into a contract, known as a lease, with the owner of an asset (the lessor). This contract grants the lessee the exclusive right to use and occupy the asset for a specified period in exchange for regular payments. The lease contract binds the lessee to certain obligations, such as payment terms and maintenance responsibilities.

Q: Is the lessee the owner of an asset?

A: No, the lessee is not the owner of the asset. In a leasing agreement, the lessee is granted the right to use the asset for a specified time period, but the ownership remains with the lessor. The lessee makes regular payments for this usage, but at the end of the lease term, unless there’s an option to purchase, the asset typically reverts back to the lessor.

Understanding the lessee lessor relationship and the components of a lease agreement is crucial for anyone involved in leasing property. By demystifying these terms, clarifying rights and responsibilities, and offering practical advice for navigating challenges, individuals can approach lease agreements with confidence and clarity. Whether you are the lessee or lessor, effective communication, thorough documentation, and, when necessary, legal guidance can help mitigate disputes and ensure a mutually beneficial leasing relationship.

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What Is a Ground Lease?

• How It Works
• Subordinated vs. Unsubordinated
• Pros and Cons

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What Is a Ground Lease? How It Works, Advantages, and Example

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A ground lease is an agreement in which a tenant is permitted to develop a piece of property during the lease period, after which the land and all improvements are turned over to the property owner.

Key Takeaways

• A ground lease is an agreement in which a tenant can develop property during the lease period, after which it is turned over to the property owner.
• Ground leases commonly take place between commercial landlords, who typically lease land for 50 to 99 years to tenants who construct buildings on the property.

Tenants who otherwise can't afford to buy land can build property with a ground lease, while landlords get a steady income and retain control over the use and development of their property.

How a Ground Lease Works

A ground lease indicates that improvements will be owned by the property owner unless an exception is created and stipulates that all relevant taxes incurred during the lease period will be paid by the tenant. Because a ground lease allows the landlord to assume all improvements once the lease term expires, the landlord may sell the property at a higher rate. Ground leases are also often called land leases, as landlords lease out the land only.

Although they are used primarily in commercial space, ground leases differ greatly from other types of commercial leases, like those found in shopping complexes and office buildings. These other leases typically don't assign the lessee to take on responsibility for the unit. Instead, these tenants are charged rent in order to operate their businesses. A ground lease involves leasing land for a long-term period—typically for 50 to 99 years—to a tenant who constructs a building on the property.

Tenants generally assume responsibility for all financial aspects of a ground lease, including rent, taxes, construction, insurance, and financing.

A 99-year lease is generally the longest possible lease term for a piece of real estate property. It used to be the longest possible under common law; however, 99-year leases continue to be common but are no longer the longest possible under the law. 

The ground lease defines who owns the land and who owns the building and improvements on the property. Many landlords use ground leases as a way to retain ownership of their property for planning reasons, to avoid any capital gains , and to generate income and revenue. Tenants generally assume responsibility for any and all expenses. This includes construction, repairs, renovations, improvements, taxes, insurance, and any financing costs associated with the property.

Example of a Ground Lease

Ground leases are often used by franchises and big box stores, as well as other commercial entities. The corporate headquarters will normally purchase the land, and allow the tenant/developer to construct and use the facility. There's a good chance that a McDonald's, Starbucks, or Dunkin Donuts near you are bound by a ground lease.

Many of Macy's stores are ground leased. Macy's owns the buildings but still pays rent on the ground the building is on. As of Jan. 28, 2023, Macy's reported long-term lease liabilities of $3 billion. This leased real estate includes small-format stores, distribution centers, office space, and full-line stores.

Some of the fundamentals of any ground lease should include:

• Terms of the lease
• Rights of both the landlord and tenant
• Conditions on financing
• Use provisions
• Title insurance

Subordinated vs. Unsubordinated Ground Leases

Ground lease tenants often finance improvements by taking on debt. In a subordinated ground lease, the landlord agrees to a lower priority of claims on the property in case the tenant defaults on the loan for improvements. In other words, a subordinated ground lease-landlord essentially allows for the property deed to act as collateral in the case of tenant default on any improvement-related loan.

For this type of ground lease, the landlord may negotiate higher rent payments in return for the risk taken on in case of tenant default. This may also benefit the landlord because constructing a building on their land increases the value of their property.

In contrast, an unsubordinated ground lease lets the landlord retain the top priority of claims on the property in case the tenant defaults on the loan for improvements. Because the lender may not take ownership of the land if the loan goes unpaid, loan professionals may be hesitant to extend a mortgage for improvements. Although the landlord retains ownership of the property, they typically have to charge the tenant a lower amount of rent.

Advantages and Disadvantages of a Ground Lease

A ground lease can benefit both the tenant and the landlord.

Tenant Benefits

The ground lease lets a tenant build on property in a prime location they could not themselves purchase. For this reason, large chain stores such as Whole Foods and Starbucks often utilize ground leases in their corporate expansion plans.

A ground lease also does not require the tenant to have a down payment for securing the land, as purchasing the property would require. Therefore, less equity is involved in acquiring a ground lease, which frees up cash for other purposes and improves the yield on utilizing the land.

Any rent paid on a ground lease may be deductible for state and federal income taxes, meaning a reduction in the tenant's overall tax burden.

Landlord Benefits

The landowner gains a steady stream of income from the tenant while retaining ownership of the property. A ground lease typically contains an escalation clause that guarantees increases in rent and eviction rights that provide protection in case of default on rent or other expenses.

There are also tax savings for a landlord who uses ground leases. If they sell a property to a tenant outright, they will realize a gain on the sale. By executing this type of lease, they avoid having to report any gains. But there may be some tax implications on the rent they receive.

Depending on the provisions put into the ground lease, a landlord may also be able to retain some control over the property including its use and how it is developed. This means the landlord can approve or deny any changes to the land.

Tenant Disadvantages

Because landlords may require approval before any changes are made, the tenant may encounter roadblocks in the use or development of the property. As a result, there may be more restrictions and less flexibility for the tenant.

Costs associated with the ground lease process may be higher than if the tenant were to purchase a property outright. Rents, taxes, improvements, permitting, as well as any wait times for landlord approval, can all be costly.

Landlord Disadvantages

Landlords who don't put in the proper provisions and clauses in their leases stand to lose control of tenants whose properties undergo development. This is why it's always important for both parties to have their leases reviewed before signing.

Depending on where the property is located, using a ground lease may have higher tax implications for a landlord. Although they may not realize a gain from a sale, rent is considered income. So rent is taxed at the ordinary rate, which may increase the tax burden.

What Are the Disadvantages of a Ground Lease?

Some of the disadvantages of ground leases include the possibility of property loss, loss of higher income due to market changes if rent increases aren't built into the agreement, and tax drawbacks, such as depreciation and other expenses that can't offset income.

Is a Ground Lease a Good Investment?

It can be. A ground lease lets a tenant build on property in a prime location they could not themselves purchase. They can invest their money in improving the property. On the other hand, a tenant may face restrictions on what they can do with the property.

What Happens When a Ground Lease Expires?

Unless you or your landlord takes specific steps to end the agreement under the lease, it will simply continue on exactly the same terms. You do not need to do anything unless you receive a notice from your landlord.

A ground lease is an agreement in which a tenant can develop property during the lease period, after which it is turned over to the property owner. Ground leases commonly take place between commercial landlords, who typically lease land for 50 years to 99 years to tenants who construct buildings on the property.

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Lessor vs lessee?

A lessor is a person or entity that owns something of value and allows people to use their property through a lease agreement. A lessee enters a lease agreement to use a lessor’s property at cost.

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What is the difference between lessor and lessee ?

The nouns lessor and lessee represent two principal parties of a legally binding contract called a “lease agreement.” A lessor owns something of value, while the lessee pays to use their asset. 

English speakers typically use words like lessor or lessee while discussing rental properties such as real estate, vehicles, or industrial equipment. For instance, someone that rents an apartment is a “ lessee ,” while the property owner is the “ lessor .” 

Business professionals also use the terms for contracts involving trademarks or brand names. For instance, anyone who opens a franchise is the owner of their location, but they lease a parent company’s brand for their business. Therefore, the location owner is a lessee to a larger business (the lessor ). 

Regardless of the asset, there are qualities of  lessor and lessee that are always true:

• A lessor provides a lessee with a lease agreement.
• A lessee provides an agreed payment to the lessor .
• A lessor retains ownership of the asset over the term of the lease. 
• Both the lessor and lessee must uphold the conditions of the lease. 

What is a lessor ?

The noun lessor represents any individual or legal entity that allows a lessee to access an asset through a lease agreement. The lessor is the legal owner of an asset, and they are entitled to a one-time payment of a series of periodic payments for the asset. 

How to use lessor in a sentence?

“The NAC group of companies is the largest lessor of aircraft to regional airlines, and the fifth largest aircraft lessor in the world…” –– Irish Examiner “Japanese lessor thrives under loose regulation.” –– The New York Times “The $20 limitation applies to licensed real estate brokers and salespeople acting as an agent of the landlord, lessor , sub- lessor or grantor.” –– Forbes

What is another word for lessor ?

Synonyms of lessor include ‘laird ,’ ‘landholder ,’ ‘landlord ,’ ‘letter ,’ ‘proprietor ,’ or ‘renter ,’ which we generally associate with real estate leases. However, lessors also lease out cars, equipment, trademarks, or brand names. In this case, we can use words like ‘investor,’ ‘company ,’ ‘owner ,’ or the leasing entity’s formal name. 

What is a lessee ?

The noun lessee is an individual or legal entity that obtains the right to use a lessor’s property through a lease agreement. Unlike a lessor , a lessee does not own the property, but they are responsible for lease payments and property maintenance for the duration of the lease. 

How to use lessee in a sentence?

“Let the lessee beware: car leases can be the most binding of contracts.” –– The New York Times “Over the hypothetical equivalent of a six-year lease, a lessee would pay a total of $33,192.” –– AP News “I’m wondering if both of us should put our names as lessees , or should one of us be the lessee and one of us the subtenant?” –– The Washington Post

What is another word for lessee ?

Most of us have been a lessee at some point, whether we’re a ‘flatmate,’ ‘guest,’ ‘lodger,’ ‘occupant,’ ‘renter ,’ ‘roommate,’ ‘tenant,’  or ‘ visitor.’ The synonyms of lessee mainly involve property rentals, but when it comes to trademarks or brand names, we can use terms like ‘franchise ,’ ‘company , ‘client ,’ ‘investor ,’ or ‘buyer .’ 

Where do the words lessor and lessee come from?

According to The American Heritage Dictionary , English speakers have used the word lessor since Middle English (c. 1150–1450), where it originated from Anglo-Norman lesser for ‘let out, ‘lease .’ The word lessor entered the English Language later on in the 15th century from Old French lesse , the past participle of lesser . 

How can a “ renter ” be a lessor and lessee at the same time?

The noun renter is an odd word because it encompasses the definition of “ lessor ” and “ lessee ” simultaneously. The caveat is that the term only applies to residential rental agreements, where a renter is either a landlord or a tenant. 

According to the Online Etymology Dictionary , English speakers began using the word renter in the late 14th century to describe a “ proprietor ” or “ anyone that rents to others .” However, the noun was not interchangeable with “ lessee ” or “ tenant ” until the 17th century. 

How the two definitions wound up with the same word is a mystery, especially since the noun rent entered Old English in the 12th century from Old French rente for ‘income’ and ‘revenue .’ Even more strange is that the verb ‘ to rent’ entered English vocabularies between the 14th and 15th centuries from Old French renter for ‘ to pay dues to ’ or ‘ provide with revenue .’ 

What is a lease agreement ?

A lease agreement (or “ lease ”) is a binding contract between a lessor and a lessee that outlines the rights and obligations of either party. It’s common for people to lease property or equipment because it’s more affordable than purchasing an asset upfront, but there’s much more to lease agreements than a one-time or periodic payment. 

Terms of a lease agreement typically include: 

• Due dates for payment and penalty fees.
• The lease’s approximate beginning and end dates.
• Conditions of property maintenance and use of the asset (and non-real property). 
• Contact information for the property owner or manager. 
• Requirements for insurance.
• Additional costs or references for essential services.

As long the lessor upholds their end of the contract, they are legally entitled to payment from the lessee . But if the lessor is unable to provide a lessee with an asset’s essential services, a lessee may be entitled to payment reductions. For instance, if a tenant is unable to access utilities or appliances for a significant period of time, they may file a claim against the landlord. 

Some leases also grant special privileges to a lessee regarding lease amendments or early termination. Let’s say an apartment tenant signed a two-year contract but needed to move out early. Depending on the rental lease, a landlord might allow the tenant to move out with a small fee or pay the remaining years’ worth of rent. 

Another key feature of lease agreements involves asset protection. In the case of residential leases, a lessor may outline a set of living standards that protect the property’s value and the quality of life for nearby residents. Standard rules often involve renter’s insurance, adhering to noise curfews, tobacco use, or the regulation of pets. 

Types of lease agreements

A lessor can lease all types of assets, whether commercial and residential estates, farming equipment, or trademarks. But with a plethora of assets comes a variety of lease types, which affect a lessee’s use of the property, time restrictions, and overall net investment. Let’s take a look: 

Building lease

According to Black’s Law Dictionary, a building lease is a long-term covenant (lease) that enables a lessee to build and own edifices (large buildings) on a lessor’s land. 

Rent-to-own lease

A rent-to-own lease allows a lessee’s weekly or monthly payments to accrue toward the purchase of a tangible asset. Unlike traditional leases, a rent-to-own lessee can end the lease contract by purchasing the asset in full or returning it to the owner. 

Due to its short-term nature and lack of federal oversight , rent-to-own leases tend to resemble credit transactions more than leases. People are also more likely to use rent-to-own for products like appliances, furniture, automobiles, or residential real estate, rather than large-scale business investments. 

Prepaid lease

Prepaid leases are different from rent-to-pay contracts because they require lessees to provide prepayment for long-term use (no more than 80% of an asset’s useful life). After the duration of a prepaid lease, a lessee may purchase the asset at present value. 

Capital lease (finance lease)

A capital lease (aka “ financial lease ” or “ finance lease ”) is a long-term contract that allows a lessee to financially benefit (or tank) from an asset without acquiring full ownership. In this sense, the lessor acts as a financier, although the lessee’s payment schedule must account for 90% or more of the asset’s market value at the start of the lease term. 

Throughout an asset’s useful life (75% or more), the lessee covers the costs of maintenance, taxes, and insurance. Because a capital lease is treated as a bill of sale , the lessee’s balance sheet must account for asset capital , such as accrued interest and principal payments. Once the lease ends, asset ownership transfers to the lessee or is available to purchase through a bargain purchase option (below current market value). 

Operating lease

An operating lease is similar to a capital lease , except it doesn’t require the lessee to claim the asset for financial statements outside of a deduction (thus, no ownership incentives). While operating leases omit bargain purchase options, the lessee’s regular payments are less than 90% of the asset’s initial market value and do not exceed 75% of the asset’s economic life. 

Sale and leaseback

Sale and leaseback agreements occur between an original asset owner and a finance entity, such as an investor, insurance company, or leasing company. A “ sale and leaseback ” occurs when an entity purchases an asset to lease it back to the original owner. 

Test Yourself!

Words like lessor and lessee are not just important to learn for finance professionals, but for any English speaker who needs to conduct formal business as an adult. See how well you understand lessor vs. lessee with the following multiple-choice questions. 

• When it comes to lease agreements, the ______________ is not _________________.  a. Lessee, the legal owner of the property b. Lessor, the legal owner of the asset c. Renter, the legal owner of the property d. Landlord, the legal owner of the asset
• Which type of lease does not enable a lessee to obtain possession of the property? a. Capital lease b. Sale and leaseback  c. Rent-to-own lease d. Operating lease
• Which of the following is not a responsibility of a lessee?  a. Understanding the end of the lease b. The owner’s net investment of the property c. The legal obligations of the lessor and lessee d. The ownership of the property
• Which is not a synonym of lessor?  a. Landlord b. Renter c. Tenant d. Letter
• Which is not a synonym of lessee? a. Renter b. Tenant c. Lodger d. Laird
• Black, H.C. “ Building lease. ” Black’s Law Dictionary , West Publishing Company, 1968, pp. 244. 
• “ Capital lease .” Business Dictionary , WebFinance, 2020. 
• “ Capital lease .” Cambridge Business English Dictionary, Cambridge University Press, 2020. 
• Gebhardt, S. “ Leasing for Couples Who Aren’t Ready to Tie the Knot .” The Washington Post , 12 July 2020. 
• Harper, D. “ Rent (v.) .” Online Etymology Dictionary , 2020. 
• Harper, D. “ Renter (n.). ” Online Etymology Dictionary , 2020. 
• Hill, G., Hill, K. “ Lease .” The People’s Law Dictionary , Law.com, 2020. 
• Kaufman, W. “ With low interest rates, should you lease or buy? ” AP News , 5 Aug 2020. 
• Lacko, J., et al. “ Survey of Rent-to-Own Customers .” Federal Trade Commission, Apr 2020. 
• “ Leases (Topic 842) .” FASB Accounting Standards Update , Financial Accounting Standards Board, Feb 2016. 
• “ Lessee .” Cambridge Dictionary , Cambridge University Press, 2020.
• “ Lessee .” Lexico , Oxford University Press, 2020.
• “ Lessor .” The American Heritage Dictionary of the English Language , 5th ed., Houghton Mifflin Harcourt Publishing Company, 2020. 
• “ Lessor .” Cambridge Dictionary , Cambridge University Press, 2020.
• O’Loughlin, A. “ Aircraft leasing company agrees to scheme with lenders .” Irish Examiner , 21 July 2020.
• “ Renter .” Merriam-Webster.com Thesaurus , Merriam-Webster, 2020. Yale, A.J. “ New York City Renters Say Goodbye To Broker Fees, Leaving Landlords To Pick Up The Slack .” Forbes , 6 Feb 2020.

Alanna Madden

Alanna Madden is a freelance writer and editor from Portland, Oregon. Alanna specializes in data and news reporting and enjoys writing about art, culture, and STEM-related topics. I can be found on Linkedin .

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Understanding your lease

Our E-Learning platform has modules for leaseholders looking to manage their own building using a RTM company.

This guide explains the most common terms of a flat lease . If you have taken the Understanding your lease quiz, […]

This guide explains the most common terms of a flat lease . If you have taken the Understanding your lease quiz , you may have found there are parts of your lease you’d like to understand better.

If you are buying a flat, this guide should help you understand the lease you are buying and help you avoid many of the problems leaseholder s ask us about.

This leaflet is not meant to describe or give a full interpretation of the law, as only the courts can do that. And it does not cover every case. If you are in any doubt about your rights and responsibilities, you should get advice from a solicitor who specialises in this area of the law.

Landlord : Typically, this is the freeholder but there are situations where your immediate landlord is the ‘head leasehold er’, not the freeholder. A ‘head leaseholder’ will be the leaseholder with the longest lease, who has leased your flat to you and who pays ground rent to the freeholder.

Right-to-manage company: The right to manage is a way for leaseholders of a building to take over managing that building. If the leaseholders have exercised their right to manage, a right-to-manage company ( RTM company ) will be responsible for managing the building. If you need the landlord’s permission under the lease, for example, to carry out alterations, sublet or keep pets, you should ask the RTM company for this permission. The RTM company will then need to give the landlord notice that you have applied for permission.

Do you have a copy of your lease?

If you do not have a copy of your lease you may be able to get one from your solicitor or mortgage lender. Usually the Land Registry will also keep a copy. Before buying a leasehold property, you should make sure you understand the main clauses of your lease.

Which area of your lease would you like to learn more about?

Click on the links below for guidance on various parts of your lease. Please remember that not all leases are the same and this guide contains examples of common lease terms.

Parties to the lease

The property, rights granted with the property, regulations.

• Lessee’s obligations

Landlord’s obligations

• Length of lease

‘Parties’ to the lease means the people or companies involved in the contract. Your lease will usually show the names of the original parties to the lease on the first page. If you have bought the lease from someone else and are not the first leaseholder, it won’t be your name that appears in the lease. However, your solicitor will have registered you with the Land Registry as the lease owner. The parties to a lease will usually be you and the landlord, but can also include a management company. This could be a management company made up of the leaseholders in the building. It is very important that you understand who the parties to your lease are. If you are buying a flat make sure your solicitor explains this to you.

Your lease will usually have a description of the as well as any other areas such as a basement. This is often referred to as the demised premises . The description will normally be described near the beginning of your lease or later on in a schedule. It may also refer to a plan. Example text you might see in your lease: ‘All that ground floor flat known or intended to be known as Ground Floor Flat 4 Wilson Road, London … edged red on the plan annexed hereto.’

This usually refers to your rights relating to access over shared areas or other parts of the building. It may include rights of way. Rights granted to a leaseholder are usually called easements in a lease. For example, you may need to walk down a path you don’t own and up a staircase you don’t own to get to your flat. It is clearly sometimes necessary for leaseholders to have rights over property they don’t own, otherwise they may find they are unable to access or use their own property. Your lease must provide you with a right of way for access. The right will often be specific about which kinds of transport you can use, for example, ‘ on foot only ’ or ‘ on foot or using a private motor vehicle ’. Your landlord cannot simply obstruct your right of way or take it away. If your landlord tries to do this, you may be entitled to compensation or possibly even an injunction to protect your rights.

The regulation s section usually contains the things you should and should not do when living in your flat. Some examples of common regulations are set out below.

There may be a requirement to keep the floors carpeted. This is particularly common in houses that have been converted into flats. Example text you might see in your lease: ‘the leaseholder covenant s to keep the floors of the demised premises carpeted at all times’ . Sometimes this is varied slightly to allow for other materials to be used, for example, ‘ the leaseholder covenants to keep the floors of the demised premises carpeted or covered with some other suitable sound deadening material at all times ’. Even if you buy the freehold of your building, you must still keep to any requirement in your lease to keep the floors carpeted.

If your lease does not say that the floors must be carpeted, you can lay wooden or laminate flooring. However, you need to make sure that you do not need to get your landlord’s permission before carrying out any alterations ( consent for alterations ). You also need to make sure this would not break any nuisance clause in the lease.

Your lease may restrict you from keeping pets or state that you need the landlord’s permission to do so. There are several common variations on this restriction. Some allow the landlord to withdraw their permission if the pet causes a nuisance.

Example text you might see in your lease: ‘not to keep any bird, dog or other animal in the Demised Premises without the previous consent in writing of the Lessor… such consent to be revocable by notice in writing at any time on complaint of any nuisance or annoyance being caused to any owner tenant or occupier of any other flat in the building’ .

If there is an RTM company you should ask them for any permission that you need.

Most leases have a clause relating to nuisance. This is to stop you from causing problems for other leaseholders in the building.

Example text you might see in your lease: ‘ not to use the Flat nor permit the same to be used for any purpose… other than as a private dwelling house in the occupation of one family only nor for any purpose from which a nuisance or annoyance can arise to the lessor or the owners lessees or occupiers of other flats in the building…nor for any illegal or immoral purpose ’.

Lessee’s (or leaseholder’s) obligations

These spell out what you are responsible for. Some examples of common obligations are set out below.

Ground rent

Ground rent is a payment generally made by the leaseholder to the freeholder under the terms of a lease. It is called ‘ground rent’ because the freeholder owns the ground which your leasehold house or flat sits on, and you have the right to live in the house or flat for the length of the lease. In the past, many ground rents were set at a ‘peppercorn’ to save the landlord having to collect the rent. However, it is also common for the lease to allow the yearly ground rent to increase at regular intervals until it reaches a fixed amount. For example under a 99-year lease, the initial ground rent may be £100 per year, going up after 33 years to £150 per year and increasing again after 66 years to £200 per year, before remaining at that level for the rest of the term of the lease.

Ground rents which increase in line with a set formula are more problematic, as it is difficult to predict with certainty what future ground rent could be and large increases are possible. Some of these ground rents may increase in line with a recognisable and published formula such as the retail prices index. More concerning is where, for example, the ground rent increases to a percentage of the open market value, or doubles every 10 years (or more frequently). The resulting yearly ground rent may make it more difficult to sell or mortgage the property.

If you are considering buying a leasehold property with ground rent, you should insist that your solicitor or conveyancer (a professional who deals with the legal process involved in buying a property) draws to your attention the implications of any terms in the lease which allow the ground rent to increase over the life of the lease.

Event fee s are paid under residential leases if certain events happen (for example, the property is sold or sublet). This is very common with retirement properties. Event fees may be given a variety of names in your lease, including exit fee s, transfer fees, deferred management fees, contingency fees and selling service fees.

Research has shown that:

• these fees can be hidden in complex leases;
• they may be triggered unexpectedly, for example, if your partner or carer moves into the property;
• they are often revealed too far into the process of selling a property for the buyer to take them into account; and
• the terms of the lease may mean that the amount of the fees is difficult to anticipate, even if the buyer knows about the fees.

Some event fee s may be used towards the sinking fund (see below) of a development or to make sure that service charge s are not too expensive. Your lease should make a distinction between those fees and any fees which are not linked to a benefit or service provided by the landlord and so are purely for the landlord’s profit.

If you are considering buying a leasehold property, particularly in a retirement development, you should ask your solicitor or conveyancer about the implications of any terms in the lease which allow an event fee or exit fee to be charged.

These are payments you make under the terms of the lease towards the landlord’s costs of running and maintaining the building, for example, the costs of arranging building insurance, maintaining the lift, cleaning the shared areas, repairing the roof or redecorating the outside of the building.

Example text you might see in your lease: ‘ pay the lessor a fair and reasonable proportion of the costs and expenses incurred by the lessor in the performance of the lessor’s covenants herein contained… ’.

You landlord must provide a summary of your rights and obligations with your service charge demand.

• Summaries of rights and obligations – Service Charges (England)
• Summaries of rights and obligations – Service Charges (Wales)

Reserve or sinking fund

Under some leases, you may pay into a sinking fund each year. This is a way to build up a fund (known as a reserve or sinking fund) that is used to cover the cost of major repairs, for example, replacing the boiler or the roof at some time in the future.

These are payments you make under the terms of your lease towards various expenses the landlord has to pay. Your lease may include the right for your landlord to charge interest on unpaid service charges, or their right to recover any legal costs they face as a result of the action they take to make sure you meet your obligations under the lease.

Example text you might see in your lease: ‘ to pay all costs and expenses that the lessor may incur by reason of any breach of the lessee’s covenants whether or not proceedings are started in a court or tribunal ’.

Alterations

There are three different ways that a lease may affect your right to make alterations.

• The lease may not mention alterations, in which case you can make any alterations you like as long as they do not damage the building or reduce the value of the flat.
• The lease may contain a clause which bans all alterations. It is important to know whether this ban applies to alterations in general or just structural alterations. For example, your lease may say, ‘ not to carry out any structural alterations or make any structural additions ’, which means you cannot carry out any structural alterations. However, if it says, ‘not to carry out any alterations or make any additions ’, this is much more extensive and means your landlord can refuse permission for any alterations without giving any reason. They are also allowed to charge a fee for giving you permission.
• The lease may state that you need the landlord’s permission before making any alterations. As in 2 above, this could apply to all alterations or just structural alterations. Example text you might see in your lease: ‘not to make any structural alterations or structural additions to the property or any part thereof without the previous consent in writing of the lessor’. If there is an RTM company, you would need to ask them for permission to make the alterations. If the parties to your lease are you, your landlord and a management company, you may need the management company’s permission to carry out alterations. It’s very important to know the difference between structural alterations and more general alterations. Structural alterations usually involve work to the load-bearing parts of the property, but can include non-load-bearing parts if the work would alter the essential appearance and shape of the property. Non-structural alterations are work to the fixtures and fittings in the property. If your lease does not completely ban all alterations, you will need your landlord’s permission, but your landlord is not allowed to refuse permission unreasonably if the alteration would improve the property. Your landlord may give you permission but set certain conditions that you must meet, for example, the need for a formal ‘licence’ to make alterations. Your landlord can charge a reasonable fee for giving you permission to cover their legal and valuation expenses.

There are usually three different ways a lease may restrict your ability to sublet, or there may be no restrictions at all. (Please note that whatever your lease says about subletting, there may still be restrictions on the use of the flat .)

• If the lease contains no restrictions on subletting, you can assume that you do not need permission to sublet.
• The lease may ban subletting altogether. Example text you might see in your lease: ‘not to underlet the whole of or any part of the demised premises ’. This usually applies to shared-ownership leases where you own less than a 100% share of the flat. Your landlord does not have to be reasonable when refusing permission. This means you will not be able to challenge them in a tribunal on this point. You will only be able to sublet if your landlord gives you permission.
• The lease may ban subletting only part of the flat. Example text you might see in your lease: ‘not to assign, underlet or part with possession of part only of the demised premises’. If this restriction appears, you are not allowed to sublet anything less than the whole flat, for example, you cannot just let a bedroom.
• The lease may contain a qualified restriction against subletting, which allows you to sublet the flat as long as you get your landlord’s permission first. Example text you might see in your lease: ‘not to underlet the demised premises without first obtaining the landlord’s consent in writing’ . If there is an RTM company, you should ask them for permission. If your lease says that you need permission to sublet your flat, your landlord cannot unreasonably refuse permission. For example, it would be reasonable to refuse permission if you are a commercial tenant and are likely to break the terms of the lease. Your landlord may give you permission but set certain conditions that you must meet, such as applying to them for a licence to sublet. They can also charge a reasonable fee to cover their costs in relation to giving you permission to sublet.

Use of the flat

Whatever the lease says about subletting, there may still be restrictions on how you can use the flat.

Example text you might see in your lease: ‘ not to use the demised premises other than as a private residence in the occupation of a single family only ’.

Such a restriction would, for example, prevent you from subletting your flat to a group of unrelated students.

Most leases will also ban you from using the flat in a way that would cause a nuisance to or annoy other occupiers in the building.

Your landlord will usually have the right to access your flat for certain purposes. Example text you might see in your lease: ‘ the lessor and the lessor’s duly authorised Surveyors or Agents may with or without workmen upon giving forty-eight hours previous notice in writing enter the demised premises for the purpose of (x) ’. Your landlord will usually have the right to access your flat to check the state of repair of the flat and to carry out repairs to other parts of the building. Your landlord has to be careful not to abuse this right, as you always have a right to live in the flat without lawful interference by your landlord. If there is a management company, the management company may have the right to enter your flat.

Check out our E-Learning platform for more information on residential leases

Module 1: introduction to residential leases.

Your landlord will have certain obligations under the lease. Some examples of common landlord obligations are set out below.

Quiet enjoyment

Your landlord must respect your right to use (enjoy) the property without any disturbance from them or anyone who works for them. In practice, other obligations might come before this one in your lease, for example, your landlord may have to carry out repairs that may cause some disturbance to tenants.

Example text you might see in your lease: ‘ the lessee paying the rents hereby reserved and performing and observing the several covenants on the lessee’s part and the conditions herein contained shall peaceably hold and enjoy the Flat during the said term without any interruption by the Lessor or any person rightfully claiming under or in trust for the lessor ’.

Although you will usually be responsible for repairing the non-structural parts of your property, responsibility for repairing the structure (including the roof and outside of the building) depends on the terms of the lease. In blocks of flats, the landlord will usually be responsible for maintaining and repairing the outside and structure of the building.

This is not always the case. For example, in a house that has been converted into two flats, the leaseholders might be responsible for repairing and maintaining the structure. Or, the leaseholder in the lower flat might be responsible for repairing and maintaining both the inside and outside of the building up to the first-floor level, and the leaseholder of the upper flat is responsible for everything above the first-floor level. In those circumstances, the lease should state who is responsible for maintaining any shared parts and how the costs should be split between the leaseholders.

Example text you might see in your lease: ‘the lessor will maintain and keep in good and substantial repair and condition the main structure of the Building including the foundations and the roof thereof with its gutters and rainwater pipes ’.

What is considered a structural repair will depend on your particular building.

In a block of flats, the landlord is usually responsible for insuring the building (although this could be the responsibility of an RTM company or a management company if there is one).

Example text you might see in your lease: ‘the lessor will at all times during the said term insure and keep insured the building against loss or damage by fire or such other risks (if any) as the lessor shall think fit in some insurance office of repute ’.

If your landlord is responsible for insuring the building, your lease will almost always allow them to recover a share of the cost from each of the leaseholders.

In some leases, usually where there are just two flats in the building, each leaseholder may be responsible for insuring part of the building themselves. This is most often the case where the lease is ‘self-repairing’ and the leaseholders own both the inside and outside of their own flat. If this is the case, you are likely to be responsible for the cost of insuring your part of the building yourself.

Another possibility, again usually where there are just two flats in the building, is that the leaseholders are responsible for insuring the whole building. If this applies, the cost of buildings insurance is usually shared between the leaseholders.

Your lease will usually state who is responsible for managing the building. This will often be your landlord, but they may employ a managing agent.

Length of the lease

This will usually be shown on the first or second page of your lease. It is very important that you know how many years remain on the lease. If you are thinking of buying a property, it is important to know this from the start. The value of your property reduces as the term (number of years remaining) of the lease gets shorter. If the lease runs out, the flat becomes the property of the landlord. If your lease has less than 99 years remaining, you might think about extending the lease. This is particularly important if your lease has just over 80 years remaining, as it is much more expensive to extend a lease which has less than 80 years remaining. Get more information on lease extension , or use our lease extension calculator to get a rough idea of the cost of extending your lease. Example text you might see on your lease: ‘ 125 years commencing 1st May 2003 ’.

We hope you have found this guide useful. Now you have read it you could try the Understanding your lease quiz again and see how much your score has improved!

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By Simon J. Levien and Maggie Astor

• Published Aug. 6, 2024 Updated Aug. 9, 2024

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