The lessee and lessor are the two main parties involved in a lease agreement
There are a couple of key factors that can be used to easily identify whether an entity is a lessee or a lessor.
The main one is ownership. A lessee is in possession of an asset or property during the term of the lease. But ownership of the asset always remains with the lessor.
The second way to identify the two parties is by examining compensation involved in the lease. The lessor receives compensation in exchange for leasing out their asset. The lessee pays out compensation to receive temporary use of the asset. Compensation will always flow away from the lessee and toward the lessor.
Example:
The City of Centerville is the legal owner of a 5 acre parcel of land. They are leasing the land to 123 Corporation in exchange for compensation of $1,000 per month, for a term of 5 years.
During the 5 year lease, 123 Corporation is in possession of the land, but The City of Centerville still remains the owner.
In this example, The City of Centerville is the lessor and 123 Corporation is the lessee.
What’s important here?
The lessor always remains the legal owner of an asset, even while it’s being leased. This provides the lessor with some additional rights.
If the lessee goes bankrupt, then the lessor has the right to receive payments first.
The lessor is also able to terminate the contract if the lessee damages the leased asset, or if the lessee breaks any of the clauses included in the lease contract.
The lessee will typically have more responsibilities, including paying utility charges, unless specified otherwise in the lease agreement.
The lessee may also be restricted to using the leased asset for specific purposes. In the case of a vehicle, they may be limited to a certain amount of miles.
