Whether lease applications or lease proposals and commitment letters are used, lease inception occurs with the closing of lease agreements. A lease agreement is a contract between a lessor and the lessee of a leased asset in which the terms and conditions of the transaction and their respective rights and obligations are set forth. Lease agreement provisions vary between lessors and market segments, depend greatly on the object, structure and purpose of the lease and include, among other things:
- The basic terms of the lease;
- Terms of care, use and location of the leased asset;
- Rental and payment terms and schedule;
- Adjustment provisions;
- End-of-term options and termination provisions;
- Lessor indemnity;
- Provisions protecting the lessor from liabilities associated with the leased asset;
- Provisions protecting the lessor’s interest in the leased asset; and
- Events of lessee default.
| Request for Proposal ⇒ | Lease Proposal ⇒ | Commitment Letter ⇒ | Lease Agreement |
|---|---|---|---|
| A prospective lessee to prospective lessors | Prospective lessors to the prospective lessee | A potential lessor to the prospective lessee | Between the lessor and the lessee |
An equipment lease agreement, which is the contractual arrangement between the lessor and lessee of equipment that regulates the transaction, can take the form of equipment leasing, equipment rental or equipment rental-purchase. Equipment lease agreements may be documented using one or more documents. Smaller leases are commonly documented using one short pre-printed form with blanks that are filled in with the financial details of the transaction and other deal specifics. Mid- and big-ticket lease transactions, especially those involving specialized equipment or complicated structures, generally use multiple lengthy documents that include provisions tailored to the specific type of asset and transaction structure.
Commercial real estate leases are generally very loosely regulated and the commercial tenant is not afforded the same legal protection enjoyed by residential tenants. Unlike residential leases, where the landlord and tenant usually sign a form lease, parties to a commercial lease typically negotiate the terms of the lease and tailor the lease according to their negotiations. The rights and obligations of landlords and tenants in a commercial lease are initially informally agreed by the parties and later formulated into a written and strongly-worded contract. Frequently, a distinction is made between “rental agreements” that have no set time period of residence and a “lease” with a set term.
| Legal Aspects | Accounting Aspects |
|---|---|
| Description | Classification |
| Lessor and Lessee Rights General Indemnification | Payment Structure Tax Indemnification |