Alanna Madden
August 19, 2020
Grammar Tips
A lessor is a person or entity that owns something of value and allows people to use their property through a lease agreement. A lessee enters a lease agreement to use a lessor’s property at cost.
Compose bold, clear, mistake-free, writing with Grammarly's AI-powered writing assistant
The nouns lessor and lessee represent two principal parties of a legally binding contract called a “lease agreement.” A lessor owns something of value, while the lessee pays to use their asset.
English speakers typically use words like lessor or lessee while discussing rental properties such as real estate, vehicles, or industrial equipment. For instance, someone that rents an apartment is a “lessee,” while the property owner is the “lessor.”
Business professionals also use the terms for contracts involving trademarks or brand names. For instance, anyone who opens a franchise is the owner of their location, but they lease a parent company’s brand for their business. Therefore, the location owner is a lessee to a larger business (the lessor).
Regardless of the asset, there are qualities of lessor and lessee that are always true:
The noun lessor represents any individual or legal entity that allows a lessee to access an asset through a lease agreement. The lessor is the legal owner of an asset, and they are entitled to a one-time payment of a series of periodic payments for the asset.
“The NAC group of companies is the largest lessor of aircraft to regional airlines, and the fifth largest aircraft lessor in the world…” –– Irish Examiner
“Japanese lessor thrives under loose regulation.” –– The New York Times
“The $20 limitation applies to licensed real estate brokers and salespeople acting as an agent of the landlord, lessor, sub-lessor or grantor.” –– Forbes
Synonyms of lessor include ‘laird,’ ‘landholder,’ ‘landlord,’ ‘letter,’ ‘proprietor,’ or ‘renter,’ which we generally associate with real estate leases. However, lessors also lease out cars, equipment, trademarks, or brand names. In this case, we can use words like ‘investor,’ ‘company,’ ‘owner,’ or the leasing entity’s formal name.
The noun lessee is an individual or legal entity that obtains the right to use a lessor’s property through a lease agreement. Unlike a lessor, a lessee does not own the property, but they are responsible for lease payments and property maintenance for the duration of the lease.
“Let the lessee beware: car leases can be the most binding of contracts.” –– The New York Times
“Over the hypothetical equivalent of a six-year lease, a lessee would pay a total of $33,192.” –– AP News
“I’m wondering if both of us should put our names as lessees, or should one of us be the lessee and one of us the subtenant?” –– The Washington Post
Most of us have been a lessee at some point, whether we’re a ‘flatmate,’ ‘guest,’ ‘lodger,’ ‘occupant,’ ‘renter,’ ‘roommate,’ ‘tenant,’ or ‘visitor.’ The synonyms of lessee mainly involve property rentals, but when it comes to trademarks or brand names, we can use terms like ‘franchise,’ ‘company, ‘client,’ ‘investor,’ or ‘buyer.’
According to The American Heritage Dictionary, English speakers have used the word lessor since Middle English (c. 1150–1450), where it originated from Anglo-Norman lesser for ‘let out, ‘lease.’ The word lessor entered the English Language later on in the 15th century from Old French lesse, the past participle of lesser.
The noun renter is an odd word because it encompasses the definition of “lessor” and “lessee” simultaneously. The caveat is that the term only applies to residential rental agreements, where a renter is either a landlord or a tenant.
According to the Online Etymology Dictionary, English speakers began using the word renter in the late 14th century to describe a “proprietor” or “anyone that rents to others.” However, the noun was not interchangeable with “lessee” or “tenant” until the 17th century.
How the two definitions wound up with the same word is a mystery, especially since the noun rent entered Old English in the 12th century from Old French rente for ‘income’ and ‘revenue.’ Even more strange is that the verb ‘to rent’ entered English vocabularies between the 14th and 15th centuries from Old French renter for ‘to pay dues to’ or ‘provide with revenue.’
A lease agreement (or “lease”) is a binding contract between a lessor and a lessee that outlines the rights and obligations of either party. It’s common for people to lease property or equipment because it’s more affordable than purchasing an asset upfront, but there’s much more to lease agreements than a one-time or periodic payment.
Terms of a lease agreement typically include:
As long the lessor upholds their end of the contract, they are legally entitled to payment from the lessee. But if the lessor is unable to provide a lessee with an asset’s essential services, a lessee may be entitled to payment reductions. For instance, if a tenant is unable to access utilities or appliances for a significant period of time, they may file a claim against the landlord.
Some leases also grant special privileges to a lessee regarding lease amendments or early termination. Let’s say an apartment tenant signed a two-year contract but needed to move out early. Depending on the rental lease, a landlord might allow the tenant to move out with a small fee or pay the remaining years’ worth of rent.
Another key feature of lease agreements involves asset protection. In the case of residential leases, a lessor may outline a set of living standards that protect the property’s value and the quality of life for nearby residents. Standard rules often involve renter’s insurance, adhering to noise curfews, tobacco use, or the regulation of pets.
A lessor can lease all types of assets, whether commercial and residential estates, farming equipment, or trademarks. But with a plethora of assets comes a variety of lease types, which affect a lessee’s use of the property, time restrictions, and overall net investment. Let’s take a look:
According to Black’s Law Dictionary, a building lease is a long-term covenant (lease) that enables a lessee to build and own edifices (large buildings) on a lessor’s land.
A rent-to-own lease allows a lessee’s weekly or monthly payments to accrue toward the purchase of a tangible asset. Unlike traditional leases, a rent-to-own lessee can end the lease contract by purchasing the asset in full or returning it to the owner.
Due to its short-term nature and lack of federal oversight, rent-to-own leases tend to resemble credit transactions more than leases. People are also more likely to use rent-to-own for products like appliances, furniture, automobiles, or residential real estate, rather than large-scale business investments.
Prepaid leases are different from rent-to-pay contracts because they require lessees to provide prepayment for long-term use (no more than 80% of an asset’s useful life). After the duration of a prepaid lease, a lessee may purchase the asset at present value.
A capital lease (aka “financial lease” or “finance lease”) is a long-term contract that allows a lessee to financially benefit (or tank) from an asset without acquiring full ownership. In this sense, the lessor acts as a financier, although the lessee’s payment schedule must account for 90% or more of the asset’s market value at the start of the lease term.
Throughout an asset’s useful life (75% or more), the lessee covers the costs of maintenance, taxes, and insurance. Because a capital lease is treated as a bill of sale, the lessee’s balance sheet must account for asset capital, such as accrued interest and principal payments. Once the lease ends, asset ownership transfers to the lessee or is available to purchase through a bargain purchase option (below current market value).
An operating lease is similar to a capital lease, except it doesn’t require the lessee to claim the asset for financial statements outside of a deduction (thus, no ownership incentives). While operating leases omit bargain purchase options, the lessee’s regular payments are less than 90% of the asset’s initial market value and do not exceed 75% of the asset’s economic life.
Sale and leaseback agreements occur between an original asset owner and a finance entity, such as an investor, insurance company, or leasing company. A “sale and leaseback” occurs when an entity purchases an asset to lease it back to the original owner.
Words like lessor and lessee are not just important to learn for finance professionals, but for any English speaker who needs to conduct formal business as an adult. See how well you understand lessor vs. lessee with the following multiple-choice questions.
Answers
