Service lease

From CEOpedia | Management online

Service lease equipment lease under which it is the lessor's (owner's) responsibility to maintain and service the leased asset. Operating leases are service leases.The service lease, which the registry grants the service consumer, specifies the amount of time the contract is valid: only from the time the consumer requests it from the registry to the time specified by the lease. When the lease runs out, the consumer must request a new lease from the registry. The lease is necessary for services that need to maintain state information about the binding between the consumer and provider. The lease defines the time for which the state may be maintained. It also further reduces the coupling between the service consumer and the service provider, by limiting the amount of time consumers and providers may be bound. Without the notion of a lease, a consumer could bind to a service forever and never rebind to its contract again. With a service lease, if a producer needs to somehow change its implementation, it may do so when the leases held by the services consumers expire. When the new contract and lease are obtained,they are not guaranteed to be identical to the previous ones.The lease is entitled to exclusive and peaceful use of the equipment during the entire lease period provided he pays the rentals and complies with the terms of the lease[1].

Operating Lease

It is a type of lease which is not a finance lease. In an operating lease, the lessor does not transfer all the risk and rewards incidental to the ownership of the asset and the cost of the asset is not fully amortised during the primary lease period. The lessor provides services attached to the leased asset, such as maintenance, repair and technical advice. For this reason, operating lease is also called service lease. The lease rentals in an operating lease include a cost for the services provided, and the lessor does not depend on a single lessee for recovery of his cost. An operating lease is structured with the following features[2]:

  • An operating lease is generally for a period significantly shorter than the economic life of the leased asset. In some cases it may be even on hourly, daily, weekly or monthly basis. The lease is cancellable by either party during the lease period.
  • Since the lase periods are shorter than the expected life of the asset, the lease rentals are not sufficient to totally amortise the cost of the assets.
  • The lessor does not rely on the single lessee for recovery of his investment. He has the ultimate interest in the residual value of the assets. The lessor bears the risk of obsolescence, since the lessee is free to cancel the lease at any time.
  • Operating lease normally include maintenance clause requiring the lessor to maintain the leased asset and provide services such as insurance, support staff, fuel, and so forth.

Sale and Lease Back and Direct Lease

It is an indirect form of leasing. The owner of an equipment sells is to a leasing company which leases it back to the owner. A classic example of this type of leasing is the sale and lease back of safe deposits vaults by banks under which banks sell them in their custody to a leasing company at a market price substantially higher than the book value. The leasing company in turn offers these lockers on a long-term basis to the bank. In direct lease, the lessee, and the owner of the equipment are two different entities[3].

Examples of Service lease

  • Cloud Computing Services: Cloud computing services, such as Amazon Web Services (AWS) and Microsoft Azure, typically offer service leases. These leases specify the amount of time that the cloud services can be used, such as a month or a year. The customer pays a certain fee for the service lease, which allows them to use the cloud service for the specified period of time.
  • Software as a Service (SaaS): SaaS leases are generally offered for a specific time period, such as one month or one year. The customer pays a fee for the SaaS lease, which allows them to use the software for the specified period of time.
  • Database Services: Database services, such as Oracle and Microsoft SQL Server, offer service leases which specify the amount of time that the database can be used. The customer pays a certain fee for the service lease, which allows them to use the database service for the specified period of time.
  • Managed Services: Managed services, such as managed hosting and managed IT services, typically offer service leases. These leases specify the amount of time that the services can be used, such as a month or a year. The customer pays a certain fee for the service lease, which allows them to use the managed services for the specified period of time.

Advantages of Service lease

A Service lease provides a number of advantages for both the lessor and the lessee. These advantages include:

  • Greater Support: The lessor is typically responsible for the maintenance and servicing of the leased asset, which can provide the lessee with greater peace of mind and assurance that their leased asset is well taken care of.
  • Cost Savings: Operating leases typically require lower up-front costs than a traditional purchase, allowing the lessee to save money in the short-term.
  • Flexibility: Operating leases allow the lessee to switch out the leased asset if their needs change without facing the same costs associated with selling and purchasing a new asset.
  • Tax Benefits: Operating leases may provide tax benefits to the lessee, such as being able to deduct the leased payments as business expenses.
  • Financial Planning: Operating leases can give the lessee more flexibility and control over their finances, as they can structure the payments to fit their budget.

Limitations of Service lease

  • Service lease agreements may be limited in their coverage and may not include additional services, such as training and upgrades.
  • The lessor may not provide a warranty or guarantee of service or performance of the equipment.
  • The lease may also involve higher costs than owning the equipment outright.
  • Service lease agreements may be long-term contracts and can be difficult to terminate.
  • The lessor may not be liable for any damage or loss caused by the leased equipment or services.
  • Service lease agreements may restrict the lessee's ability to upgrade or modify the equipment, potentially limiting its usefulness.
  • The lessee may not be able to transfer the lease or the equipment to another party.
  • Service leases may involve additional fees for late payment or other conditions that must be met in order for the lease to remain in effect.

Other approaches related to Service lease

  • Service Level Agreements (SLAs): SLAs are agreements between two parties that specify the level of service to be provided and the conditions under which that service will be provided. SLAs are typically used to define the scope and parameters of a service, such as cost, availability, and quality.
  • Pay-per-use contracts: Pay-per-use contracts allow customers to pay for services or resources on a usage basis. This allows customers to pay for only the resources or services they need, when they need them.
  • Capacity-based contracts: Capacity-based contracts allow customers to lease a certain amount of resources or services for a specified time period. This approach allows customers to ensure that the resources or services they need are available when they need them.

In summary, other approaches related to Service lease include Service Level Agreements (SLAs), Pay-per-use contracts, and Capacity-based contracts. These approaches provide customers with the flexibility to pay for the services or resources they need, when they need them, and ensure that the resources or services are available when needed.


  1. J.McGovern, S.Tyagi, M.Stevens, S.Mathew 2013,p.40
  2. M.Y.Khan 2010,p.62-63
  3. M.Y.Khan 2010,p.63

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Author: Patrycja Bajda