Lease

A lease is a contract-based property rent involving the fixed-term compensated possession and use or temporary use of property by transferring it by the lessor to the lessee for a fee.

Lease explained

Both movable and immovable property can be leased. According to the law, in the case of leasing real estate, the contract is subject to state registration.

Lease of temporarily vacant buildings, constructions, equipment and vehicles by operating enterprises is widely spread. The subject of the lease agreement may also be property complexes, such as enterprises. This creates conditions for the rapid commissioning of production facilities and the use of existing infrastructure, primarily by small and medium-sized enterprises. Lease agreements may be concluded for land plots and other natural objects.

The lease agreement involves two parties: lessee and lessor.

Lessor — the owner of the property, leasing it out (persons authorized by the law or the owner to lease out the property may also act as the lessor).

Lessee — the recipient of the property, using it for its own purposes in accordance with the purpose of the property or under the conditions set out in the contract.

The lease agreement shall contain the description of the object of lease; amount of rent, form and procedure of its payment; rights and obligations of the parties regarding storage and maintenance of the leased property; term of the agreement, rights and obligations of the parties upon its termination; possibility of subletting the leased property; conditions of termination of the contract. In case of breach of the terms of the lease agreement it may be terminated.

The advantage of lease relations is the possibility for the lessee, in case the need to use the property disappears, to transfer with the lessor's consent the rights and obligations under the lease agreement to another person - in this case a sublease agreement is concluded.

As a consequence, the possibilities of enterprises to effectively use the leased facilities in accordance with the changing conditions of economic activity are significantly expanded. The term of the sublease agreement cannot exceed the term of the lease agreement.

Types of Lease

The most common method of rent establishment types determining a fixed amount of payment calculated on the basis of:

• value of all leased property; 
• separately for each of its constituent parts. 

Payments are usually made periodically at times specified in the contract. However, lump sum payments are also possible. When renting buildings and structures, the rent is usually set per unit area based on the actual size of the leased property.

The lessee is the owner of the products and income generated by the use of the leased property. Rent can be paid by transferring a portion of the production to the lessor or by providing certain services, which is the lessee's preferred method if there is a shortage of cash. As a fee for the use of the property, the lessee may be charged the costs of improving the leased facilities. Thus, the rent is determined both in monetary terms and in kind. Various combinations of these forms of payment are also used.

In case the operating companies lease out separate items of fixed assets, the rent payment is included in income from non-operating operations. Depreciation charges are accrued by the lessor and are reimbursed at the expense of the rent received and included in the expenses from non-operating operations. The exception is depreciation deductions made by the lessee on the property under the lease agreement of the enterprise. In this case the lessee includes the lease payment in production costs.

When establishing the amount of the lease fee it is advisable to take into account, along with other factors, the average level of rent in the region for similar objects.

The amount of the rent payment does not remain constant during the term of the contract, but changes due to the changes in the operating conditions of enterprises, and first of all — due to the changes in market prices for equipment. 

At the same time, frequent revision of the rent does not contribute to the creation of stable conditions for the efficient use of the leased property, that is why the amount of rent payments can be revised not more than once a year. When buildings and structures are leased, the rent payment should include the cost of using the land plot on which it is located.

When entering into a lease agreement, the lessee is charged with the obligation to maintain the property in good condition and perform routine repairs to ensure that the leased facilities are preserved and returned at the end of the lease term in their original condition, taking into account normal wear and tear. 

In turn, the lessor is responsible for defects in the leased property. If the lessee, with the lessor's consent, has made individual improvements to the leased property, they become his property — otherwise he is paid their cost. Major repairs to the rental property are usually carried out by the lessor.