Long term lease

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Long term lease
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A long-term lease is a type of contract between two parties in which the owner (in other words lessor) of the given asset agrees to rent the said object in question to another person (the so-called lessee or tenant) who will use the object for a predetermined period [1]. Unlike a short-term lease, long-term commitment applies to a much longer time. Usually, such agreement lasts for over one, 5, 10 or even more years, depending on the type of asset being rented. In most cases, during the lease, unless the contract provides otherwise, the liability for the leased object rests at the tenants’ side. Nowadays, a long-term lease is one of the fastest-growing methods of obtaining fixed assets on the US financial market [2] .

Examples of assets often leased in a long-term

A long-term lease can be used in any type of asset. The most popular subjects of such agreements include, among others[3]:

  • ground rents - Land belongs to assets that are mainly leased for very long periods, mainly over 20 years. Usually, in a rented area, the tenant proceeds to the building construction. Land lease agreements often have adjustment clauses in their content that change their value. They should be drawn up with care because after it expires, all amendments in the leased area are usually transferred to the lessor.
  • office buildings and warehouses – in a situation where a given company does not have sufficient funds to build or buy office or storage space for itself, a long-term lease is often the perfect solution. By dividing the price into monthly or annual installments, the lessee can pay for the rented space from the profits generated through its use.
  • equipment - in the current situation technological progress forces changes in the operation of some machines. Therefore, many of them often become obsolete quickly. In this case, the company can benefit from leasing the machinery instead of buying it.

Advantages of the long-term lease

The main advantages of using long-term lease agreements are :

  • Financial stability - the lease contract usually assumes that the price of the asset is fixed throughout the duration of the agreement. This means that, even with the market trending up prices, the fee paid for a given object does not change, which often leads to significant financial gains.
  • Predictable costs - in long-term lease, costs are easy to foresee. After signing the contract, the tenant can calculate the expenses related to the contract into the budget far ahead with certainty that they will not change.
  • Security - upon making of a business plan, a company that rents assets can be sure that they will not lose them overnight. This gives one the option of calmer future planning.

Disadvantages of the long-term lease

The main disadvantages of using long-term lease agreements are :

  • Long and difficult negotiations - it is often difficult to make both parties happy when fixing the details of a long-term lease. A long commitment makes it necessary to determine all the details before signing the contract.
  • Long-term commitment - many companies go bankrupt in the first few years of operation. Therefore, when signing a long-term lease, it should be borne in mind that the company is involved in the undertaking for years ahead without the possibility to change the terms of the agreement.

Footnotes

  1. Lilleholt K. i in. (2009) Lease of Goods, Walter de Gruyter, p.225
  2. Needles B., Powers M., Crosson S. (2010) Principles of Accounting, Cengage Learning, p.568
  3. Roark W., Roark W. (2013) Concise Encyclopedia of Real Estate Business Terms, p.61

References

Author: Kinga Więcek