lease

Definition

Written or implied contract by which an owner (the lessor) of a specific asset (such as a parcel of land, building, equipment, or machinery) grants a second party (the lessee) the right to its exclusive possession and use for a specific period and under specified conditions, in return for specified periodic rental or lease payments. A long-term written lease (also called a deed) creates a leasehold interest which in itself can be traded or mortgaged, and is shown as a capital asset in a firm's books. Advantages of leasing include (1) lack of restrictive covenants (common in bank loans and bond indentures), (2) conservation of capital (because the lessor provides 100 percent financing), (3) tax savings (in most cases), (4) avoidance of the risk of obsolescence, and (5) relative ease of obtaining a lease as opposed to a comparable bank loan. In most cases a lease, in effect, is a hire-purchase agreement without the requirement of an initial deposit and the added advantage of tax benefits. See also capital lease, operating lease, and, sale and leaseback.