Lessor vs. Lessee: What is the difference between Lessor and Lessee?

Lessor vs. Lessee: Let’s discuss their key differences, similarities, pros & cons, define which is better and which role to choose, and finally, answer some frequently asked questions (FAQ)
Lessor vs. Lessee: Top 6 Differences, Pros & Cons

Lessor vs. Lessee: When you are about to enter into a lessee and lessor lease agreement, you must know the basic difference between the roles of the two. A lessor is the owner of an asset whereas a lessee acquires a right to use the asset by paying a certain sum of money periodically.

Understanding the meanings of lessor and lessee

To understand the meaning of these terms, let us get into the lessor and lessee definition in detail here:

What does Lessor mean?

A lessor can be defined as the property owner who enters into a lease agreement with a lessee to grant him the legal right of using the property for a particular period. He periodically receives a predefined amount as compensation for giving access to his property.

What does Lessee mean?

A lessee is a person who acquires the right to use an asset for a particular period and agrees to pay a certain amount in return that is defined in the lessor and lessee contract.

What are the advantages of Lessor and Lessee?

Advantages to Lessor

  • The ownership right of the property lies with the lessor securing him in the case of default.
  • He enjoys tax benefits by leasing out an asset with a high depreciation rate.
  • He earns a fixed income in the form of interest paid by the lessee.
  • He is given priority in payment in case the lessee becomes bankrupt.
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Advantages to Lessee

  • The lessee gets control of an asset with only a little initial investment.
  • He receives tax benefits on the lease installments paid.
  • A lease is a flexible option for the lessee as the contract can be terminated if he doesn’t require the asset anymore.

What are the disadvantages to Lessor and Lessee?

Disadvantages to Lessor

  • A lease agreement usually requires the lessor to block his funds in an asset for the long-term.
  • He can only receive the fixed rental mentioned in the agreement, even if the value of his asset increases considerably.
  • He doesn’t have the right to use his assets. 

Disadvantages to Lessee

  • The lessee doesn’t have the right of ownership over the asset.
  • The cost of damage must be borne by the lessee that occurs during the lessor and lessee agreement period.
  • The lessee is prohibited from making any structural changes on the property or asset without taking prior permission from the lessor. 

What is the difference between lessor and lessee?

There is a clear difference between lessor and lessee that can be comprehended well by examining the following table of differences:

BasisLessorLessee
Ownership He holds all the ownership rights of the asset.He doesn’t have any ownership over the leased asset.
Lease rentalsHe is entitled to receive the lease rentals from the lessee.He is entitled to pay the lease rentals to the lessor.
Legal rightHe has the legal right to the leased asset.He doesn’t have any legal right over the leased asset.
BankruptcyAs the lessor is liable to receive a fixed amount from the lessee, he gets priority in payment if the lessee gets bankrupt.Since the lessee is not bound to receive any payments from the lessor, he is not considered for payment if the lessor gets bankrupt.
Use of assetHe has no right to use the asset as he is receiving fixed rental to forego that right.He carries all the right to use the leased asset within the restrictions mentioned in the agreement.
DamagesSince he is not using the asset, the cost of damages will not be borne by him.He is responsible for repairing any damages done to the lessor’s asset.

What are the similarities between a lessor and a lessee?

  • Both lessor and lessee agree to the terms of the lease agreement.
  • The lessor and lessee have rights on the same asset, with the lessor having the ownership rights and the lessee having the right to use.
  • Both of these parties enjoy some benefits from the agreement they enter into.
  • They are bound by the lease agreement for the same number of years.
  • Both lessor and lessee have legal status in the eyes of the law due to the lease agreement they enter into.
  • They have to honor the clauses of the lease agreement without any alterations.
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What is a person who leases called?

A person who leases the property is often addressed as a lessee, and he is liable to pay a certain amount to the owner who is defined in the lease contract.

How do I become a landlord with no money? 

To become a landlord with no money, one can utilize the power of a lease agreement. As a lessee, you won’t be required to invest in the property you want to rent out but will get all the operating control for using it freely. This arrangement allows you to cover your lease rent from the rental income you receive. Therefore, you can become a landlord without investing any money from your pocket.

What is a consumer lease? 

The consumer lease can be defined as an agreement between two parties for the use of a personal asset, like a laptop, for a specific period. The property can be either used for personal, family, or household purposes. Consumer lease does not cater to agricultural, business, or commercial use.

What is a finance lease agreement? 

A finance lease is an agreement drawn between two parties where the lessor is a financial company and the legal owner of the asset. The lessee, in such an agreement, is entitled to certain monetary benefits arising due to a change in the valuation of the asset under a lease.

Which role is suitable for you?

In this ever-changing financial world where lessee and lessor accounting standards are changing rapidly, it is essential to demarcate the roles of lessee and lessor. If you have surplus funds at your disposal, become a lessor. But if you necessitate an asset, become a lessee.

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Lessor vs. Lessee: Let’s discuss their key differences, similarities, pros & cons, define which is better and which role to choose, and finally, answer some frequently asked questions (FAQ)

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IAS 17 – 7 (A) – Lessee vs Lessor
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