A lease agreement -also defined as financial lease agreement- is acontract by and between a leasing company (the lessor) and alessee whereby the leasing company transfersthe use and enjoyment of aproperty to the lessee in exchange for a periodic consideration during a certain time.
Advantages and disadvantages of leasing
If you are planning on entering into a lease agreement, you must consider the following advantages over other financing options:
-It allows to finance full investment: it does not require an initial outlay to start using the asset, so you can continue your business without making a down payment.
– You can apply depreciation on the assets: the investment is deemed expense for taxation purposes, and there fore the company’s profits are reduced and less taxes are paid.
– Property ownership: once the agreement terminates, you can keep the property ownership.
-It does not imply an increase in debt, which means that no penalties will be imposed when requesting a loan from a credit institution.
-It allows a faster adaptation to technological changes, since it is able toreplace the good in case of obsolescence.
However, a lease agreement also entails some disadvantages:
-It maybe way more expensive than the terms offered by a financial institution.
– You may notget the property ownership until the termination of the agreement.
– You pay always the same amount, despite deterioration of the property.
Types of lease agreements
There are different types of lease agreements depending on a series of criteria, such as its purpose or type:
Purpose of the agreement
Operational lease: agreement where by a company undertakes to temporarily assign to another company the use of an assetor piece of equipment in exchange for a periodic consideration,undertaking to replace obsolete technology.
Financial lease: a lease agreement whereby a party undertakes to acquire an asset from a third party, the other party having previously chosenthe said assetagainst payment of a mutually agreed price for its use and enjoyment for a certain time.
Equipment lease: agreement executed by and between a leasing company and a user who undertakes to acquire movable assets which have been previously chosen by the user,their use being then transferred to the user for a specified time andin exchange for a periodic payment. Once expired the said term, assetscan be acquired by paying the residual value.
Property lease: a contract whereby a company, instead of acquiring a property, reaches an agreement with the leasing company,which acquires it from a third party and assigns its use for a certain time against the agreed rent, and usually under an agreement including a right of first refusal clause in favour of the user.
The content of a lease agreement should match the specific interests of your company, but it should also include a number of mandatory clauses for it to be deemed a lease agreement and be valid for all legal purposes.
Our lawyers specialised in Commercial Law at Carbray will advise you in order toprotect your interests and ensure compliance of the agreement. They will draft and review your lease agreement so as to ensure that all mandatory clauses are included, as well as those clauses which fit the intricacies of your business.