DEFINITION OF LEASE
This is a contract in which the lessor (the owner
of the asset) allows the lessee to use the asset in consideration of a rental
payment made periodically. It is one of the most important source of external
finance. It involve two parties- the lessor and the lessee.
TYPES OF LEASES
The following are types of lease:
1. Operating lease.
2. Financial lease
3. Maintenance lease.
4. Leveraged lease.
5. Sale and lease back.
i. OPERATING LEASE: This is type of lease in which the contract can be cancelled by either of the parties upon due notice to the other. This implies that there is no definite duration for the contract.
ii. A FINANCIAL LEASE on the other hand is a firm and building contract between the lessee and the lessor for a specified period and cannot be cancelled or amended unless all the parties agree. The lessor is not expected to maintain or service the assets under a financial lease, unless otherwise agreed.
iii. MAINTENANCE LEASE: Under this type of lease the lessor is expected to maintain and service the assets during the period of the lease. This occurs mostly in the lease of computers, photocopiers and other technical equipments.
iv. A LEVERAGED LEASE: Also called a third party lease is a type of lease that involves a third party (i.e. in addition to the lessee and lessor). Under this type of lease the lessor borrows money from the lender to acquire the asset, which is then lease to the lessee
.
v. SALE AND LEASE BACK: This occurs where a firm sells part of his fixed asset to the firm. The ownership of the assets stays with the new buyer while the firm retains possession and use of the asset.
CHARACTERISTIC OF LEASE
1. It involve maturity date.
2. It is subjected to re-newer at the opinion of lease.
3. In most cases reconstruction on lease asset.
ADVANTAGES OF LEASE
The following are basic advantages of lease
a. The lease premium is fixed and payable at regular intervals.
b. There is no need for any initial outlay since the lease agreement usually covers the total finance for the acquisition of the asset.
c. The timing of the rental payment can be so flexible.
d. The secondary period of the lease ( which is usually the last two years of the working life of the assets) attract only nominal rental.
e. Both parties benefit from the agreement as the lessor may not use the property while the lessee is in need of it. It provides income for the lessor on the property is not ready to use and it also provide income to the lessee that uses someone property.
DISADVANTAGES OF LEASING
The following are the main disadvantages of lease.
1. The lessee is subjected to the contract for the entire validity period of time.
2. Terminating the contract can be very costly for the both party
3. It attract higher fixed cost per year
4.The lessor can take over the asset in case of default and that will lead to great lose on the part of the lessee.
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