Rent vs. Lease

Over the years we have seen many experts and their articles burst the similarities and differences between rent and lease.

Yet here we are, confused and still unclear whether to rent or lease an asset.

Concepts like rent and lease apply to all the things owned by human beings.

They are vital legal documents that need to be completed before leasing or renting a property by the parties involved.

The decision to rent or lease depends on the nature of the asset.

You can rent or lease anything whether it's a piece of land or a laptop, a Boeing or a bicycle.

On the surface, they seem similar but there are major differences between the two.

Let's start differentiating between the two based on the constraints these work within.

General Definition

A lease is a contract between two parties where the asset is allowed to be used and controlled by another party for a defined period without actually buying it. Renting is a short-term agreement between the two parties where one party pays rent for the use of asset to the owner of the asset.

The contract in which the terms and conditions of the lease are defined is known as Lease Deed. Various types of lease deed are as follows -

- Finance Lease

- Operating Lease

- Sale and Lease Back

- Direct Lease

- Open-ended lease

- Close-end lease

- Single investor lease

- Leveraged lease

- Domestic Lease

- International Lease

Terminology

The parties involved when an asset is given on rent are Owner and Tenant. Owner is the one who gives the asset on rent and Tenant is the one who takes the asset on rent.

The parties involved when an asset is given on lease are Lessor and Lessee. Lessor is the one who gives the asset on lease and Lessee is the one who takes the asset on lease.

Maintenance

When an asset is given on rent, the responsibility for the maintenance of the asset belongs to the Owner or the landlord. In some cases, it might be the Tenant's responsibility as well which depends upon the nature of the contract.

When an asset is given on lease, the responsibility for the maintenance of the asset belongs to the Lessee.

Duration

Rent agreements for an asset are generally signed for a short time whereas Leasing contracts are signed for medium to a long time. Rent agreements can extend up to 60 months whereas leasing contracts may extend for 99 years.

Charges

The tenant under the rental the agreement is supposed to pay monthly or quarterly instalments or rent whereas a lessee under the leasing contract is supposed to pay fixed monthly instalments.

Contract Modifications

The rent agreement renews after every 30 days and can be modified or terminated by the landlord or the owner of the asset after discussing it with the tenant or written notice is given 30 days before the amendment. But the leasing contract cannot be changed or modified under any condition for the entire duration of the contract. In both cases, the contracts and agreements are formed after mutual discussion and consent.

Subletting

Tenant in the rent agreement can’t sublet the property whereas lessee in the lease contract can sublet the premises.

After Expiry

Once the duration is over the landlord asks the tenants to move out of the property, return the asset or continue their stay with a newly signed agreement but during a lease contract, once the duration is over the lessee is offered by the lessor to purchase the asset.

Accounting Standard

For lease - AS-19

For rents - no specific standard

The decision to rent or lease depends on various situations such as -

- Capital

When a party doesn't have ample fixed capital and they urgently require the asset or property, they often take the lease. However, if there are no issues with fixed capital income the party may opt for rent.

- Duration of stay

Rent benefits people who only need to stay in a certain place during a transition or acquire an asset or when they are unsure of how long they want to rent in a specific area.

- Stability

Lease contracts are advantageous to people because it fixes the monthly lease. And the factors such as lease amount and length cannot be changed even if property or rent values rise.

The nature of the document

This piece of legal document is provided to avoid disputes and hold either of the party accountable for the violation of the document. Whether its rental agreement or leasing contract the document should settle out issues such as -

- The duration of stay

- The amount of rent and deposits the tenant/lessee must pay

- Number of people allowed to live on the property

- Who will pay for the maintenance

- Who will pay for the court proceedings and documents or will they be shared