Lessor vs. Lessee: How Different Types of Leases Work

A lessor provides an asset to another person or party for use over an agreed-upon period. The lessor—sometimes a property owner, car dealership, or other leasing company—will grant use of the asset via a rental agreement. The lessor or a lease administrator will maintain financial statements to ensure the renter meets all legal obligations and makes lease payments on time.

The lessor, or lender, typically holds ownership rights over the good and must be transparent in all disclosures regarding the state of the good or service. People lease cars, homes, insurance policies, and other goods and commodities.

The lessee is the person or party renting a good or service from the lessor. The lessee is not the legal owner of the asset; instead, they rent the property for the duration of the lease by making periodic payments. To lease the asset, the renter usually has to show proof of salary via an income statement, which ensures the person has the funds to lease the asset. They might also make a one-time payment at the start of the contract, sometimes in the form of a security deposit.

Lessor and lessee are both leasing terms that differ in their prescribed roles. The lessor will control or own the property, car, or asset. The lessor individual or leasing company will lease out the asset to the lessee, who will pay for its use over a set period by making payments, often in monthly installments.

While the lessor usually defines the terms of the lease agreement based on the rental valuation, the lessee can sometimes negotiate price and details. Sometimes, the lessee can buy the asset from the lessor after making sufficient payments, but parties must agree upon those terms at the contract signing.

Common types of lease agreements include:

1. 1. Capital lease: This financial lease gives theoretical ownership rights, but not the deed, to the lessee. The lessee will have to pay for all upkeep and damages, but they are welcome to use the property or asset as they see fit. The lessee assumes both the risks and benefits of the good.
2. 2. Leaseback: This type of agreement, also known as a sale and leaseback, has one party purchase an asset from another and then lease it back to them. In this case, the seller immediately becomes the lessee and the buyer the lessor. This lease agreement is more common among financial institutions and insurance companies.
3. 3. Operating lease: This type of lease ensures the lessor retains all ownership rights over the asset. The lessor is in charge of all maintenance and day-to-day expenses while the lessee pays for the good in set installments the contract defines. Renting an apartment is an example of an operating lease.

All you need is a MasterClass Annual Membership and our exclusive video lessons from prolific entrepreneur Robert Reffkin, the founder and CEO of the real estate technology company Compass. With Robert’s help, you’ll learn all about the intricacies of buying a home, from securing a mortgage to hiring an agent to tips for putting your own place on the market.