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Lease: Definition Essential & Types

WHAT IS A LEASE?

Sec. 105 of the Transfer of Property Act, 1882 defines a lease as a transfer of the right of entitlement of an immovable possession for a specified period of time, in return for a promised price, service, or any other valuable property which the parties have agreed upon, by one party (transferee) to another party (transferor). The property mentioned here could be both tangible and intangible; lease facilitates the transfer of property.[i]

ESSENTIALS OF A VALID LEASE

Competent parties: to enter into a valid agreement of lease, the parties to the agreement should be competent to enter into a legally binding contract. He must not of unsound mind and should not be disqualified to enter into a contract. Also, the lesser should be truly and absolutely entitled to a property that is the subject of the lease agreement.

Transfer of ownership: in agreement to lease, only the right of possession is transferred and not the right of ownership. The possession is transferred from the lessee to the lessor, but the right of ownership remains with the lessee. The transfer of rights must only involve the right to use the property.

Rent or premium: the consideration for lease can be a periodical payment; that is to say, the consideration for lease can be in the form of rent or premium or both. The amount is recovered in lump-sum, it is called a premium, and if recover periodically, it is called rent. The rent need not be in the form of money; it could be service, shares, or other things so rendered.

Acceptance: the lessee has to accept the agreement as per the conditions imposed on the transfer.

Time period: the right to enjoy the property is not unlimited and is subject to a certain period of time, as mentioned in the lease agreement. However, the time period can be relaxed at the option of the lessor. A lease that extends for a period of more than a year can only be made through a registered document.[ii]

THE DIFFERENT CLASSES OF LEASE 

Financial lease: in such a lease, all the risks and rewards related to a property are transferred from the lessor to the lessee. Such an agreement of lease is irrevocable and is also contracted for a longer-term. The lessee pays more than the property’s actual price, and this extra charge is called a lease charge. The lessee maintains the property, and the lessor provides no service.

Operating lease: in this kind of lease, all the assets’ risks and rewards are not transferred from the lessor to the lessee. The lease is contracted for a limited period of time, and it the responsibility of the lessor to bear the cost of maintenance of the property leased.

Sales and leaseback leasing: in such a lease, the assets are sold by the lessee to the lessor, with an advance agreement of leasing the asset back to the lessee for a fixed period of rent. This lease is also called a bipartite lease.

Direct lease: the lessor holds or acquires an asset. There are three parties involved in such a lease: the equipment seller, lessor, and the lessee, and it is also called a tripartite lease.

Single investor lease: in this kind of lease, the lessor arranges money to finance his asset by debt or equity.

Domestic lease: as the name goes, when the parties to the lease reside within the same country, the lease is called a domestic lease.

International lease: it further consists of two lease types- Cross border and Import lease. When both the parties reside in one country, and the supplier resides in another country, such a lease is called an import lease. And when the lessor and lessee both live in different countries, it is called cross border lease, irrespective of the supplier’s residence.


Endnotes

[i] Section 105, Transfer of Property Act, 1882.

[ii] Section 107, Transfer of Property Act, 1882.

By – Maruti Nandan

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