UNIVERSITY „VITEZ“TRAVNIK

FACULTY OF LAW

LEASE

ESSAY

Subject: English Language

Professor: Vesna Biljaka

Student: Ismet Rešić

...... 9 SUMMARY ........... 5 TYPES OF LEASE ……........................................ 8 SALE AND LEASE BACK ................................ 3 CONCEPT OF LEASING …..........…………………………………………………………… 4 STEP INVOLVED IN LEASING TRANSACTION ………………….................................................... 10 REFERENCES .............................................…………………………………………………………...............................……………………………………………………………………… 6 LEVERAGE LASE .........……..................................…………………...................................... 8 CROSS BORDER LEASE ............................................................................................CONTENT INTRODUCTION …………………………………………………………..........................................................................................…………………………………………………………………………....... 5 OPERATING LEASE ..... 11 ....

Leasing has emerged as a new source of financing capital assets. 1. modern business environment is becoming more and more complex. INTRODUCTION Traditionally firms acquire productive assets and use them as owners. firms are required to go for massive expansion. the firms aim at growth with stability. . To succeed in the situation. Over the years there has been a declining trend in the internally generated resources of Indian companies due to low profitability. severe cost escalation. diversification and modernization. High rate of inflation. Further. To accomplish this objective. Essentially such projects involve a huge amount of investment. the financial institutions experience paucity of funds at their disposal to meet the increasing needs of borrowers. The sources of finance to a firm for finance to a firm for procuring assets may be internal or external. heavy taxation and meager internal resources forced many companies to look for alternative means of financing the projects.

Lease rentals can be conveniently paid over the lease period out of profits earned from the use of the equipment and the rent is cent percent tax deductible.Dictionary of Business and Management - 'Lease is a form of contract transferring the use or occupancy of land. in consideration of a payment.Equipment Leasing Association of UK - 'A Contract between lessor and lessee for the hire of a specific asset selected from a manufacturer or vendor of such assets by the lessee. 2. The rentals are predetermined and payable at fixed intervals of time. By resorting to leasing. is an arrangement between two parties. . the lessee company is able to exploit the economic value of the equipment by using it as if he owned it without having to pay for its capital cost.' Thus in a contract of lease there are two parties involved (i) lessor and the lessee. The lessee can be even a doctor or any other specialists who use costly equipment for the practice of his profession.' . according to the mutual convenience of both the parties. the lessor remains the owner of the equipment over the primary period. CONCEPT OF LEASING Leasing. the leasing company or lessor and the user or lessee. A Lease is Defined as follows: . a partnership firm or an individual in manufacturing or allied activities. Van Horne - 'Lease is a contract whereby the owner of an asset (lessor) grants to another party (lessee) the exclusive right to use the asset usually for an agreed period of time in return for the payment of rent. as a financing concept.James C. The lessor retains the ownership of the asset. whereby the former arranges to buy capital equipment for the use of the latter for an agreed period of time in return for the payment of rent.' . space. structure or equipment. The lessor can be a company. usually in the form of a rent. However. The lessee has possession and use of the asset on payment of specified retain over the period. a co-operative society.

2. TYPES OF LEASE The lease agreement can be classified broadly into four categories: 1. scooters and other vehicles and durables. settles the rice and terms of sale and arranges with a leasing company to buy it. maintains it.Leasing as a Source of Finance Leasing is an important source of finance for the lessee. Net lease and Close lease. Cars. taxes. the lessee has to decide the asset required and select the supplier. He has to decide about the design specifications. (c) Details of any option to renew the lease or to purchase the asset at the end of the period. Leasing companies finance for: 1. The lessee uses the equipment exclusively. Financial Lease A financial lease is also known as Capital lease. He also bears the risk of obsolescence as it stands committed to pay the rental for the entire lease period. Balancing equipment. . 3. the price. After the lease agreement is signed the lessor contacts the manufacturer and requests him to supply the asset to the lessee. (b) The timing and amount of periodical rental payments during the lease period. Long-term lease. warranties. 4. He enters into a irrevocable and non-cancellable contractual agreement with the leasing company. The lessee. the lessee selects the equipments. Assets which are not being financed by banks/institutions. 3. First. The lessor makes payment to the manufacturer after the asset has been delivered and accepted by the lessee. terms of delivery. insurance and other expenses. (d) Details regarding payment of cost of maintenance and repairs. In a financial lease. 4. The lease agreement contains the terms and conditions of the lease such as. Modernisation of business. 5. STEP INVOLVED IN LEASING TRANSACTION The steps involved in a leasing transaction are summarised as follows: 1. (a) The basic lease period during which the lease is irrecoverable. then enters into a lease agreement with the lessor. 3. insures and avails of the after sales service and warranty backing it. servicing etc. 2. Items entitled to 100% or 50% depreciation.

paying taxes. OPERATING LEASE An operating lease is also known as Service lease. UK and Japan. six months.The financial lease could also be with purchase option. diesel generators. 5. Short term lease or True lease. vehicles. scheduling and performing maintenance and keeping complete records lease is suitable for. 75 to Rs. In this lease. textile machinery. where at theend of the predetermined period. locomotives etc. the financial leases are used as financing cum tax planning tool. 100 crores is transacted as a tax planning device. The lease is terminable by giving stipulated notice as per the agreement. The risk of obsolescence is enforced on the lessor who will also bear the cost of maintenance and other relevant expenditure. and the rate of depreciation and other tax benefits available.. periodicity of rent payment. The leasing company also charges nominal service charges to cover legal and other costs. material handling equipments etc. Normally. may be a month. The leasing company may also insist on collaterals or bank's guarantee in individual cases. copy machines and other office equipments. the lease rentals will be higher as compared to other leases on account of short period of primary lease. the period of lease. On an all India basis. machine tools. The lessor also does the services like handling warranty claims.financial lease is very popular in India as in other countries like USA. are leased under financial lease. at present. (i) Computers. The high cost of equipments such as office equipment. This means that the lease is for a limited period. Which are sensitive to obsolescence and (ii) Where the lessee is interested in tiding over temporary problem. containers. a year or few years. the rate of lease would be fixed based on the kind of lease. . the contractual period between lessor and lessee is less than the full expected economic life of equipment. The financial lease may also contain a non cancellable clause which means that the lessor transfers the title to the lessee at ·the end of the lease period. The . the lessee has the option to buy the equipment at a predetermined value or at a nominal value or at fair market price. Under a financial lease. In a large number of cases. approximately a lease worth Rs.

3. 5. It is a legal commitment to pay for the entire cost of the equipment plus interest over a specified period of time. office equipments. 6. land and building heavy machinery are leased. Operating Lease 1. Leasing company assumes risk of obsolescence. It places the lessee in a position of borrow. An operating lease is a rental agreement. The financial commitment is restricted to regular rental payment. Air crafts. Contracts are usually cancellable either by the lessor or by the lessee. 4. 3.Distinction between a Financial Lease and Operating Lease Financial Lease 1. Contract period ranges from medium to long term. Contract period ranges from intermediate to short-term. automobiles. The lessor fulfills financial function.0perating lease provides for maintenance expenses and taxes of the lessor. A financial lease is like an installment loan. . Computers. 2. 8. The lessee is not committed to paying more than the original cost of equipment during contractual period. 8. Contracts are usually non cancellable. The lessee commits to a series of payment which in total exceed the cost of the equipment. The lessor fulfills service function. are leased. It excludes provisions for maintenance or taxes which are paid separately by the lessee. 5. The lease involves a financial commitment similar to a loan by a leasing company. 7. The risk of obsolescence is assumed by the lessee 4. truck etc. 7. 2. 6. The rentals find a place in the P & LAic of the lessee.

The lessor acquires the assets as per the terms of the lease agreement but finances only a part of the total investment. ships etc. a wide range of equipments such as rail road. The balance is provided by a person or a group of persons in the form of loan to the lessor. interest expenses related to his borrowings are also tax deductible. In leveraged lease. coal mining. there are some attractive investment features in the form of after-tax consequences for the owner of the equipment. 2 crore arid has economic life of 10 years or more. The outlay for purchase cost of the asset generally varies from Rs. In addition. property taxes and - insurance. 50 lakhs to Rs. The title to the asset vests with the lessor. lease rentals are deductible in full as an operating expense. the lessor is entitled to 100% allowance for depreciation plus the investment allowance. .% or 25% of the cost of an asset. 6. 7. The sale and lease back agreement is beneficial to both lessor and lessee. are acquired. office buildings. multipurpose industrial building and shopping centres are financed under this method. From the point of view of lessee. Retail stores. In some cases. electricity generating plants. rolling stock. pipe lines. The firm makes periodical rental payment to the lessor. The firm receives the sale price in cash and gets the right to use the asset during the lease period. LEVERAGE LEASE A leverage lease is used for financing those assets which require huge capital outlay. Most of the lease back agreements are on a net . the lease agreement allows the lease to repurchase the property at the termination of lease. say 20% to 50%. By investing 20. The asset is generally sold at its market value. The loan is generally secured by mortgage of the asset besides assignment of the leased rental payments. The position of the lessee under a leveraged leasing agreement is the same as in the case of any other type of lease. a firm which has an asset sells it to the leasing company and gets it back on lease. SALE AND LEASE BACK Under this type of lease.net basis which means that the lessee pays all maintenance expenses. Under a leverage lease. The leverage lease agreement involves three parties. the lessee. the lessor and the lender. The lessor gets immediate cash which becomes available for working capital or for further expansion and lessor gets tax benefits.

8. Indian leasing industry is unlikely to deal in export border leases for big ticket items such as aircraft but it is well placed to contribute to India's export earnings by offering the lease option. . In otherwords the lessor may be of one country and the lessee may be of another country. if a leasing company in USA makes a available an Air bus on lease to Air India. It relates to a lease transaction between a lessor and lessee domiciled in different countries and includes exports leasing. To illustrate. there would be a cross border lease. CROSS BORDER LEASE Cross border lease is international leasing and is known as transnational leasing. First Leasing Company has initiated discussions with Bulgar Leasing of Bulgaria to export bull dozers and shovels in significant number of an export lease to that country.

delays in payments including bad debts. operating. 9. . Lease rent paid by lessee is fully deductible for tax purposes. Both private and sectors provide lease finance. faster and cheaper credit. leverage and sale and lease back. Leases are of four types. lease arrangements are not suitable for project finance. Lease arrangement allows lessor to use equipment and pay for it from profits earned from its use. protection against obsolescence etc. SUMMARY Lease is a contract whereby the owner of an asset (lessor) grants to another party (lessee) the exclusive right to use the asset usually for an agreed period of time in return for payment of rent. The lease rent is treated as income in lessor's books and as expense in lessee's books. financial. There isrno separate Act to regulate leases and they are governed by the section 148 of the Contract Act on bailment. Lease is accounted by lessor showing the asset on his balance sheet and claiming depreciation and other tax shields on the asset. However. lackof qualifiedpersonnel. The leasingbusinesssuffersfrom unhealthycompetition. Advantages of lease are alternative use of funds available to lessee. may not have tax incentives declared by the Government and normally cost more than debt financing. burden of sales tax as well as stamp duty. flexibility.

REFERENCES: 1.10. Roman Private Law. mandatory part 2. Contract Law .

Master your semester with Scribd & The New York Times

Special offer for students: Only $4.99/month.

Master your semester with Scribd & The New York Times

Cancel anytime.