What is a Lease Agreement?
The modern-day and age has seen a rapid increase in lease contracts being signed. This is primarily because of the fact that companies are beginning to realize the advantages of procuring assets via lease. Hence, it makes sense for companies to ensure that they are able to create lease agreements that are representative of the lease contract that has been signed between both companies.
A lease agreement tends to be a memorandum of understanding between both the parties involved in terms of their agreed-upon terms and conditions pertaining to the event of the lease itself.
The main premise of the lease agreement stands to outline and obligate the responsibilities of the landlord (or the lessor) and the tenant (or the lessee). It mainly explains what the landlord and the tenant have agreed upon in terms of the length of the lease, in addition to the monthly rental lease, and the underlying responsibilities of the tenant when it comes to the lessor itself.
Hence, it can be seen that the lease agreement mainly includes all the covenants that form to be basis of the lease agreement. There are numerous different reasons as to why lease agreement is drafted in the first place. These covenants are mentioned below.
Why is a Lease Agreement drafted?
The main premise of conducting a lease agreement lies in the realms of adding a much-needed layer of protection between the lessor and the lessee. The main rationale behind the lease agreement is summarized below:
- Communication Tool between both lessor and lessee: The lease agreement includes several different covenants that formulate the lease agreement. Factually, it entails information that summarizes the lease duration, with a proper description of the asset, as well as other terms and agreements between both the parties involved.
- Protective Covenants between both the parties involved: Since lease can also expand over a considerable time period, it is important to have properly drafted terms and conditions in order to ensure that in case either of the party wanting to cancel the agreement, they have a draft in place that can potentially protect them if such a case arises. It is imperative for organizations to ensure that they have the proper protection in place.
- Legal protection: This tends to be one of the most important factors behind which a lease agreement is drafted. Factually, in the case where there is a dispute between both parties, in that case, reconciliation is carried out using the lease agreement. It is important to realize that a lease agreement tends to have all the information present that can help both parties in case of a dispute that arises.
Therefore, it can be seen that the main rationale behind lease agreement is primarily on the grounds of ensuring that there is proper clarity regarding the contract between both the parties. It helps them to plan and protect themselves against possible losses, so that there are no issues arising as a result.
What does a Lease Agreement include?
As mentioned earlier, it can be seen that a lease agreement includes several important components. These components are summarized below:
- Name of the parties involved: As mentioned earlier, it can be seen that the lease agreement includes both, the lessor, as well as the lessee. Their names, as well as their contact details, should be properly included in the lease agreement. In the case of organizations, all the relevant information, as well as the lease arrangements should be duly included.
- Duration of the lease: Duration of the lease is another major aspect that needs to be covered when it comes to a leasing agreement, primarily because of the reason that it helps to notify the longevity of the contract itself and the tenure during which the lease would stay applicable.
- The asset description: It is also important to include the asset description in terms of ensuring that all details of the asset are included. The asset specifications, in addition to the condition of the underlying asset, maintenance charge on the asset, and other miscellaneous features of the asset need to be included in the lease agreement. This is to avoid confusion in order to reduce the underlying confusion pertaining to the asset itself. This will help to eliminate any confusion relating to the asset condition, and other salient features that will help form better communication regarding the asset itself.
- Payment details: Over the course of the lease agreement, lease payments take place on a periodic basis, based on which all these details need to be drafted. As a matter of fact, it is important to consider the fact that there needs to be proper clarity regarding the payment details so that the lessee can properly plan out their expenses in a proper manner. The schedule of payment also helps them to ensure that they do not miss out on any lease payments.
- Other related covenants: Other related covenants are highly important when it comes to leasing agreements, essentially because of the fact that it helps to classify the lease type and the kind of contract that the company is getting themselves into. It is an important element in the overall state of affairs because it clarifies the segregation of lease agreements, and what needs to be taken care of in order to ensure that the lease agreement gets fulfilled in a proper manner. Furthermore, these lease covenants are also important because they clarify some of the minute details that are included in the lease process itself. Some example of these covenants are summarized below:
- Maintenance Cost
- Depreciation Charge
- The intent of Purchase – Bargain Purchase Option
- Additional Fee
- Lease Cancellation: Lease cancellation is another important element that arises quite a few times in cases where parties no longer wish to move forward with the lease. This might either be because of the fact that companies do not wish to continue with the machines that are currently being set, or they find a better alternative to the current asset. In such cases, the lease agreement normally includes an exit route that can be followed if such a situation arises.
Therefore, it can be seen that the lease agreement is basically a very important document because it encapsulates all the important information regarding the lease contract, and what exactly needs to be taken care of in order to ensure that there is no rift between both the parties when they move forward with the lease arrangement. Hence, it is mandatory for them to ensure that they incorporate all the important elements in the contract, which can be referred to in the time of confusion.
As far as the format of the lease agreement is concerned, it can be seen that there is no strict or stringent format that needs to be followed. However, with lease agreements, it is important to ensure that companies are able to include all the relevant information, along with signed copies from both the parties (and/or their representatives) in order to ensure that both of them are on the same page.
The draft of the lease copy should be widely accepted, and there should be no ambiguity regarding the legality of the agreement that has been drafted. It should be accepted by both parties with a proper understanding of what it entails and the role they have to play in order to ensure that the overall lease contract is carried out in a smooth manner.