Lease

What Is a Lease?

A lease is a legally binding agreement that gives one party, the lessee, the right to use property owned by another party, the lessor, for a defined period. The lessee usually makes regular payments to the lessor, typically called rent. Leases are most familiar in housing, but they also cover offices, retail space, vehicles, and equipment. Ownership stays with the lessor throughout the term, which is the key difference between leasing and buying.

How Leases Work

Every lease sets out the core terms: the asset being rented, the length of the agreement, the payment amount and schedule, and each side's responsibilities. Many leases also address security deposit amounts, maintenance, insurance, and what happens if either party wants to end the agreement early. When the term ends, the lease may expire, renew, or convert to a month-to-month tenancy. Commercial leases often use a net lease structure, in which the tenant pays some or all property costs, such as taxes and insurance, on top of base rent.

Lease Accounting

Businesses that lease assets must record them under accounting rules. Under current standards, most leases appear on a company's balance sheet as a right-of-use asset paired with a corresponding liability. Leases are generally classified as either a finance lease or an operating lease. A finance lease resembles an asset purchase financed over time, while an operating lease is closer to a rental expense. Investors reading a company's financial statements can use these disclosures to understand how much the company relies on leased assets.

Advantages and Disadvantages

For lessees, leasing can reduce the upfront cost of acquiring an asset and may shift some maintenance or obsolescence risk to the lessor. The drawbacks include paying for an asset without building ownership equity and possible penalties for ending the agreement early. Lessors receive steady income and keep ownership of the asset, but they take on the risk that the lessee may fail to pay. Lease terms are often binding for many years, so the full obligations matter before signing.