In India, a person can enjoy another person’s property for a prescribed time which is specifically mentioned in a lease deed. Here, property includes both tangible and intangible property and also movable and immovable property. Lease acts as a mode of transfer of property under the Transfer of Property Act, 1882. According to the Act[i], lease is defined as –
“A lease of immoveable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms.”
In simple terms, lease is a kind of encumbrance on a property in the form of a right to possess and enjoy property owned by another person.
The person who transfers the property (transferor) is known as the lessor. The person to whom the transfer is made(transferee) is known as the lessee. The price here is known as the premium and the money, share, service or any other thing so rendered in known as the rent.[ii]
Hence, the essential conditions for lease according to Section 105 of the Transfer of Property Act, 1882 are :-
1. There must be an immovable property
2. The transfer of right must only involve the right to use the property i.e. possession and not ownership.
3. The consideration for lease shall be periodical payment which is either rent or premium or both.
A lease that extends for a period of more than a year can only be made through a registered document.[iii]
The different types of lease –
Financial lease
In this type of lease, the lessor transfers all the risks and rewards substantially related to the asset to the lessee.[iv] This is a long-term lease and is irrevocable in nature. The lessee pays more than the total cost of the property or equipment which is known as lease charges. The entire burden of maintaining the property is on the lessee and the lessor does not render any service from his end. [v]
Operating lease
In this type of lease, the lessor does not transfer all the risks and rewards of the asset to the lessee.[vi] The lessee uses the asset for a limited time and it is the lessor who bears the cost of maintaining the property and any other costs which arise related to the property.[vii]
Sale and Lease Back Leasing
In this type of lease, the lessee sells the asset to the lessor with an advance agreement between the two of leasing the asset back to the lessee for a fixed lease rental per period. Such a lease is also known as Bipartite lease.[viii]
Direct Lease:
This is a simple type of a lease where the asset is owned by the lessor or he acquires it. In this type of lease, there are three parties, namely, equipment supplier, lessor and lessee and hence, a direct lease is termed as a tripartite lease.[ix]
Single Investor Lease:
In his type of lease, the lessor has to arrange for money in order to finance his asset by way of debt or equity. The lender cannot recover anything from the lessee, in case the lessor defaults in payment.[x]
Leveraged Lease:
There are three parties in this type of lease – the lessor, the lessee and the financier/lender. Here, lessor arranges for the equity and the financier has the responsibility to finance the debt. The link between the lessee and the lender is direct if in case the lessor defaults.[xi]
Domestic Lease:
As the name suggests, when the parties to the lease reside within the same country, the lease is known as a domestic lease. [xii]
International Lease:
There are two kinds of International Lease – Cross border lease and Import lease. An import lease occurs when the lessor and the lessee reside in the same country and the equipment supplier resides in a different country. On the contrary, when the lessor and the lessee reside in two separate countries ‘X’ and ‘Y’ then the lease is known as a Cross border lease. It doesn’t matter where the equipment supplier resides. [xiii]
Therefore, these are the eight common types of lease agreements that are used in India and outside India. No statute in India does not govern the above-mentioned types of lease.
Edited by Chiranjeeb Prateek Mohanty
Approved & Published – Sakshi Raje
Reference
[i] Section 105
[ii] Ibid
[iii] Section 107
[iv] Types of Lease | Classified based on Risk, Reward, No. of Parties etc., eFinanceManagement.com (2019), https://efinancemanagement.com/sources-of-finance/types-of-lease (last visited Apr 14, 2019).
[v] Different types of leases, Money Matters | All Management Articles (2017), https://accountlearning.com/different-types-of-leases/ (last visited Apr 14, 2019).
[vi] Types of Lease | Classified based on Risk, Reward, No. of Parties etc., eFinanceManagement.com (2019), https://efinancemanagement.com/sources-of-finance/types-of-lease (last visited Apr 14, 2019).
[vii] Different types of leases, Money Matters | All Management Articles (2017), https://accountlearning.com/different-types-of-leases/ (last visited Apr 14, 2019).
[viii] Types of Lease | Classified based on Risk, Reward, No. of Parties etc., eFinanceManagement.com (2019), https://efinancemanagement.com/sources-of-finance/types-of-lease (last visited Apr 14, 2019).
[ix] Ibid
[x] Ibid
[xi] Ibid
[xii] Ibid
[xiii] Ibid
