Leasing- A complete guide to rent out your property

Leasing is a generic phrase used when negotiating the land or property. Hence, when individuals decide to rent out their flat or property, they could choose leasing.

Interestingly, people would miss out on minor details of a lease agreement, causing a commotion. It is prudent for both a tenant and a landlord to be aware of their rights and liabilities to avoid stumbling blocks and enjoy a smooth transition in which a landlord safeguards his priorities. A tenant enjoys the property he rented.

Leasing concept

Meaning

Leasing happens when one person, through a contract, conveys or rents his property to another person for a determined period in exchange for a periodic or lump-sum payment.

Terminology

This article will introduce four terms related to the leasing of immovable property, which are as follows:

• Lessor- The lessor is the person who transfers the immovable property.
• Lessee- The transferee of immovable property gets referred to as the lessee.
• Premium- The cost of obtaining a lease on immovable property.
• Rent- Refers to the money or service that is provided.

The components of a valid Leasing Agreement

For a leasing agreement to be valid; it&’s essential to meet specific conditions, which includes:

Competence of Lessor and Lessee

For a valid lease, both the lessee and lessor must be competent enough to form a contract. To be competent, a lessor and lessee must be:

• The lessee is required to be a major.
• The lessor must-have title to the property and the authority to make the lease.
• The lessor and lessee must both be of sound mind.

Subject Matter of Leasing Agreement

The lease’s subject matter must be immovable property, such as a flat, house, or loft.

Consideration

Such a Leasing contract must include some form of consideration. There would not be a valid lease in the absence of adequate and legal consideration; instead, it would be treated as a gift.

The consideration should usually be in the form of a premium plus rent, but it could also be a premium or rent only.

Duration

A lease for an immovable property must be for a minimum of 11 months. Such leasing agreement could only be made by a registered instrument if the duration exceeds a year, i.e. 12 months or more, as per Section 107 of the Transfer of Property Act, 1882.

Delivery and Acceptance

The lessor must deliver the contract, and the lessee must accept the contract without undue influence or coercion. The lease becomes effective when the lessee agrees with the contract.

Different Kinds of Lease

Leases broadly get classified into two types:

• Financial Lease
• Operational Lease

Financial Lease

Though the device used in a Financial Lease is leasing, the purpose and effect are virtually financings – leasing of funding. However, the previously mentioned generic differences between a lease and a lease remain.

The lessor will provide the money required by the lessee to purchase an asset; in exchange, the lessee will make payments in the form of lease rentals.

The lease amount is the total amount financed. A Financial Lease is a clone of a lease. This lease should get treated as a lease, with the lease amount serving as the principal and interest getting charged.

Lease for Operations

It is a non-monetary lease. An operating lease refers to any lease that is not a financial lease. The lessor does not operate the asset leased in a financial lease; he merely finances it.

The term ‘operating lease’ is used in contrast to Financial Leases to indicate that the lessor is ‘operating’ the asset. As a result, an operating lease is any lease in which the lessor takes a risk other than a simple financial risk. This lease should get treated as a lease with no principal and the entire lease amount paid in instalments as a special interest.

Advantages of Leasing

• The most important advantage of leasing is flexibility, and the leasing company adjusts the arrangements to meet the needs of the lease.
• When comparing the term loans from financial institutions, leasing requires less documentation.
• It is a different way for getting or other financial services from a financial institution. So, banking and financial institutions are now venturing into the leasing business, as this method of financing is more appealing to manufacturing units.
• A leasing company may provide complete (100 per cent) financing for the cost of equipment. However, banks and other financial institutions, may not provide for the same.
• The ‘Sale and Lease Bank’ arrangement permit lessees to borrow in a financial emergency.
• The lessee may be eligible for tax benefits depending on his tax status.

Disadvantages of leasing

• The cost of interest in leasing is exceptionally high.
• At the end of the lease period, the asset reverts to the owner, and the lesser loses his claim to the residual value.
• Leasing is ineffective for starting new projects because the rentals become due soon after the assets are acquired.
• In the majority of cases, the lessor leases out assets that he purchased with the help of bank credit. If the lessor is unable to make the payment to the bank, the bank will seize the asset, much to the detriment of the lessee.

Conclusion

Now, it might be clear about certain aspects involved in leasing, like the essential elements of the leasing agreement, the lessor and the lessee, which are an integral and necessary part of a lease deed.

It is a clear fact that the lessor must disclose facts and avoid interruptions while the lessee is leasing the property.

On the other hand, a lessee needs to take reasonable care of the property while also paying his or her rent. A property lease is distinct from a property sale, and this article clarifies that aspect of property law.

About Author

Deeksha Arora

Deeksha Arora is a Post Graduate from the Rajiv Gandhi National University of Law, Patiala, with a specialisation in Business Law.

She has a penchant for research and legal writing and wishes to pursue a career in academia.

See author's posts →