Despite the similar-sounding names, a lessor and lessee hold two different meanings. A lessor is a person who owns the property or asset that is being rented out. Lessees are the people who are paying to borrow the item. Lessors legally own the item even if the lessee currently has it with them, which is why lessors generally have to pay taxes for the item they rent out.
Leases are everywhere in society. If you want to borrow a car, rent an apartment, or borrow a piece of machinery, you’ll likely have to sign a lease. When signing a lease agreement, you’ll often see two terms repeated: lessor and lessee. The two sound alike, but they are different.
Both the lessee and lessor are the main parties in a lease agreement, but each one has its own set of responsibilities and expectations. The lessor is the owner of the property that is being leased out, while the lessee is the person borrowing it.
If you’re a lessee, you might be wondering what expectations are involved in your end of the agreement. What are you in charge of? What is the lessor in charge of? Keep reading to find out and learn more about the two terms.
What are a lessor and lessee?
Though both words sound similar, lessors and lessees have different roles when it comes to a lease agreement.
- Lessor. A lessor is the owner of the asset or property and may also be referred to as a property owner or landlord. They do not possess the property for their own use. The lessor signs a contract and gives the asset to the lessee for a certain period of time. The lessor retains ownership rights of the asset even when they are not in possession of it.
- Lessee. The lessee — who may also be known as a borrower, tenant, or renter — is the person who borrows the asset or property for a set amount of time. The lessee signs a contract agreeing to pay the lessor to use the property. When the contract ends, the lessee returns the leased property to the lessor.
Lessor vs. lessee: Key differences
The main difference between the two is the ownership of the asset. The lessor owns the property, while the lessee pays to borrow it.
Because the terms lessee/lessor can be easily confused, we’ve laid out the key differences between the two parties.
Responsibilities of a lessor and lessee
Both the lessor and lessee have individual responsibilities. The terms and conditions of these responsibilities will be laid out in the lease agreement. It usually states how long the lessee can borrow the property for and how much they are expected to pay the lessor.
Because the lessor has legal ownership rights of the property or asset, they are in charge of the upkeep and paying taxes.
For example, if the lessor is renting out an apartment they own, they would be in charge of covering maintenance costs and paying property taxes. The lessor is also responsible for terminating the contract under certain circumstances.
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Although the lessee possesses the property, they are not the legal owner of the asset. This means the lessee is not responsible for paying taxes on the asset, but they do have to pay to use the asset. In addition to paying for the asset, the lessee must follow the terms and conditions outlined in the lessor’s lease agreement.
For example, if a lessee is renting an apartment, the lessee pays rent to live there but does not legally own the property.
Examples of differences
If you’re still confused between the two terms, here are a few examples of an exchange where one person is a lessee and the other is the lessor.
- John owns a moving truck. Sarah wants to borrow the moving truck for three days. Sarah signs a lease agreement to borrow the truck for three days and return it on the fourth. She agrees to pay John $300 per day. In this case, John is the lessor, as he owns the truck. Sarah is the lessee because she is paying to use the truck but does not own it.
- Victoria owns a home and is renting it out to Nick for $3,000 each month. The lease agreement between Nick and Victoria allows him to live there for at least one year. After one year, he will have to renew the lease or move out. Victoria is the owner and pays maintenance costs and property taxes. Because of this, she is the lessor. Nick is paying to live on the property but does not own it, so he is the lessee.
- Katrina is renting out her basement apartment to Laura. Katrina owns the apartment and pays property taxes, and Laura pays Katrina $900 a month to live there. Laura will have to move out at the end of her two-year lease. Even though Katrina does not live there, she is still the lessor, as she owns the apartment. Laura is the lessee since she pays to live there.
Types of lease agreements
There are many different types of lease agreements, each with its own unique set of rules. The four we’ll go over here are capital lease, sale and leaseback, operating lease, and real estate lease.
1. Capital lease
With a capital lease, the lessee — or borrower — has complete control and ownership of the asset. This means they are in charge of all legal obligations and costs surrounding the asset, including maintenance and repairs. This is a long-term lease agreement and is also referred to as a finance lease or financial lease.
2. Sale and leaseback
Sale and leaseback agreements are when one person buys an asset from another person and then immediately leases it to the seller.
So, if Darcy bought a building from Jesse, she would lease the building out to Jesse. Darcy would be the owner and lessor, and Jesse would be the lessee. This type of lease contract is usually used by an insurance company, investor, leasing company, or institution.
3. Operating lease
An operating lease allows the borrower to use the asset, while the lessor maintains property ownership of it. The lessee is in charge of maintaining the upkeep of the asset and covers daily expenses for it. The lessee only gets to borrow the property for a specific period of time, and the lessor pays for maintenance costs.
4. Residential leases
There are three main types of real estate leases: gross lease, net lease, and modified gross lease.
- Gross lease. This lease usually includes all expenses, such as maintenance or air conditioning, in the cost of the rent.
- Net lease. A net lease has a base rate for the rent, with other items such as insurance added on top of it.
- Modified gross lease. This lease is a mix of both and opens up more opportunities to negotiate.
In all cases, the lessor is the owner of the property, while the lessee pays to live there.
- Lessors and lessees are the main parties involved in lease agreements.
- Lessors are the owners of the asset being leased out, while lessees are the ones borrowing the asset.
- Even though the lessee possesses the asset, they are not the legal owner of it.
- The lessor is usually in charge of covering maintenance costs or taxes surrounding the asset, even if it is not currently in their possession.
View Article Sources
- Lessor Resources — U.S. General Services Administration
- Leased vehicles. — Washington State Legislature
- Can You Lease a Used Car? — SuperMoney
- Ultimate Guide to Buying Out of a Lease Early — SuperMoney
- Buy or Lease? What to Know Before You Decide on Your New Ride — SuperMoney
- How Much Does It Cost to Lease a Solar Power System? — SuperMoney
- Best Renters Insurance | June 2022 — SuperMoney
Camilla has a background in journalism and business communications. She specializes in writing complex information in understandable ways. She has written on a variety of topics including money, science, personal finance, politics, and more. Her work has been published in the HuffPost, KSL.com, Deseret News, and more.