Service lease

Service lease
See also

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[edit]

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[edit]

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].

Footnotes[edit]

  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

References[edit]

Author: Patrycja Bajda