In a lease, the lessor is the person or entity that owns the item, possession, or asset; the lessee is the person or entity who pays for the use of that item. Leases are contracts that state the lessor will allow use of the asset for a certain amount of time if payments are made correctly and other conditions are met.
Leases are very common on vehicles, homes, and commercial real estate. Learn more about how a lessor and a lessee enter into a relationship when they create a lease agreement between them.
Definition and Examples of Lessor
A lessor in an agreement to rent something is generally the person who owns the asset. Usually, a lessor issues a lease agreement to allow a lessee, the person using the asset, to live in a property or drive a car for a period of months or years. The agreement includes periodic payments, often monthly, and is contingent on a certain standard of care for the asset itself.
For example, if you’re interested in moving your small business into an office, the lessor might be the owner of the business office building. They would show you the available offices and discuss the amenities, size, and pricing structure for each one.
When you both agree on the office that suits your needs, the lessor will draw up an agreement that outlines the costs and rules for using the property. In this case, the lease agreement specifies you as the lessee, the person responsible for payments for the office in exchange for use of the property.
Both lessor and lessee should pay close attention to the terms of the lease. They may include consequences for ending the contract early; for example, if you wanted to move out before the full term ends. The lessor might offer a longer lease term for a lower payment; for example, a discount for signing a 24-month lease instead of a 12-month lease. Lessee would weigh the better price against their need to stay for longer, and factor in any early-termination fee.
How the Lease Agreement Works
Renting allows someone to turn their assets into steady income by leasing them to people who need them.
The lease agreement, reviewed and signed by both parties, ensures several things. It establishes both the rights and the responsibilities of the lessor and lessee. It explains the consequences should either party decide to no longer keep their end of the deal. That often includes penalties and fees, or the possibility of eviction or repossession.
The lease agreement is usually time-bound, which can benefit both parties. At the end of the term, the lessee can look for a new arrangement or renew at the end of the contracted period, and the lessor can renew with the lessee or choose to do something different with the asset, such as use it themselves or sell it.
Ensuring Your Lessee’s Rights
In many cases, lessors have an obligation to ensure the rights of a lessee through their contracts. For example, lessors who lease residential rental property must include specific terms about their own obligations in their lease agreements.
While landlord obligations vary from state to state, a basic set of rights have been established that can protect lessees, who can seek redress if their lessors aren’t, for example, maintaining the property according to the lease agreement. Lessors who work in commercial real estate also have some legal responsibilities to their lessees.
Renting vs. Leasing
The terms “rent” and “lease” are often used interchangeably. However, in some cases, there may be a distinction. When there is a distinction, it often falls along the lines of rent, including terms of any length, and leases being for longer terms.
|Rental Agreement||Lease Agreement|
|Umbrella term for any short-term use of someone else’s asset.||Frequently refers to a rental commitment that usually lasts a longer time, at least six to 12 months.|
|Frequently used for both real estate and vehicles, as well as boats, machinery, and other items.||Less commonly refers to hourly or day rentals that are paid all at once. Focuses on installment-based, monthly payment cycles.|
- A lessor is the owner of an asset used by someone else in exchange for payments. The other party is called the lessee.
- Lease agreements govern how lessors and lessees will interact, including their rights, responsibilities, and consequences for not upholding an agreement.
- Rental agreements are general category, including both short-term rentals and longer-term rentals that have formal lease agreements.