Lessor vs. Lessee: How Are They Different?

When we think of leases, we often think of a landlord and a tenant. While commercial and residential real estate leases are common, you can lease almost any asset. Equipment, vehicles, and even trademark leases are important aspects of our economy and sometimes our daily lives. 

No matter the asset, the cornerstone of every contract is a strong relationship between the lessor and lessee. Building this relationship starts with a deep understanding of your role.

Lessor vs. lessee at a glance

Both parties enter into a contract called a lease or rental agreement, typically for residential or commercial real estate. The lessee makes payment(s) to the lessor for use of the property or asset.

Lessor meaning: The owner of an asset who grants the right to use it to another party through a lease agreement. The property owner can be an individual or a company.

Lessee meaning: The other party who obtains the right to use an asset. The lessee can also be an individual or company.

Lease vs. rental agreement: Rental agreements are typically short-term or month-to-month, while lease agreements are often six months or more.

Lessor vs. lessee: Roles and responsibilities

While the details of this dynamic will depend on the context of the lease, there are common obligations that each party should consider before entering into a new contract.

Successfully navigating these duties depends on clear communication, comprehension of legal rights and responsibilities, and cooperation between both parties regardless of the leasing situation.

Lessor roles and responsibilities:

• Payment: The lessor dictates the amount, frequency, and duration of lease payments.
• Maintenance: The lessor is responsible for major, and sometimes minor, repairs to the asset while it is in their care or if it's a real estate property.
• Negotiations: The lessor communicates with the lessee to negotiate the terms of the lease. For example, a lessor may want to raise the lease price based on market trends.
• Security deposit: The lessor may retain or deduct from the security deposit to fund any damages to the asset that the lessee caused.

Lessee roles and responsibilities:

• Payment: The lessee is responsible for making periodic payments in accordance with the terms of the lease. For example, by the due date specified in the contract.
• Maintenance: The lessee is responsible for maintaining the asset's original condition, with the exception of normal wear.
• Negotiations: The lessee can negotiate the terms of the lease with the lessor for more favorable terms. Doing so can avoid confusion or unfavorable circumstances down the line.
• Security deposit: The lessee can document the condition of the asset to avoid paying for pre-existing damages.

Key differences between a lessor and a lessee

These differences will vary depending on the type of lease you have, so we always recommend seeking legal advice to best understand each party's rights and responsibilities in your specific case.

That said, here is a brief overview of the key differences between a lessor and lessee across most lease agreements.

Ownership

The lessor retains ownership rights, while the lessee has usage rights for the duration of the lease agreement. Although the lessee can negotiate certain privileges—such as early termination of the lease, renewal with unchanged terms, or permission to sublease—whether or not to accept these terms is ultimately up to the lessor.

Control and responsibilities

Most jurisdictions have an implied warranty of habitability that requires landlords to keep the property livable and consistent with local housing codes. That said, responsibilities for property maintenance and expenses can vary depending on the type of lease agreement.

For real estate, vehicles, and equipment, the lessee is responsible for maintaining the original condition of the asset. For example, they'll have to pay to fix any damages they've directly or passively caused to the asset.

Financial aspects

The lessor receives periodic lease payments from the lessee based on the terms of their contract, which can be monthly, quarterly, or yearly, depending on the lease. The lessee is responsible for regularly making payments based on the terms of the contract​.

In this way, the lessor generates income from leasing the asset, and the lessee uses the asset without having to pay the full purchase price. In some cases, the lessee and lessor can agree on a lease-to-buy option, in which lease payments eventually convert into a down payment to purchase the leased asset.

Rights and obligations

The lessor has the authority to enforce lease terms and take action if the lessee fails to comply​. The lessee must comply with all lease terms, and any changes to the property usually require lessor approval.

That said, if the lessor fails to maintain the asset to meet legal and safety standards, the lessee can withhold lease payments until those standards are met, as long as they're in a jurisdiction that follows the habitability warranty mentioned above.

Both parties can request proof of reliability. For example, a lessor can request evidence of reliable income or credit, and the lessee can request proof of ownership and evidence of the asset's good condition.

Use and access

In some cases, the lessor may have limited access to the property or asset unless specified otherwise in the lease agreement. The lessee typically enjoys exclusive use of the asset during the lease term. This right is called quiet enjoyment, which protects a lessee's right to use the property or asset undisturbed.

Types of lease agreements

These are some of the common types of lease agreements.

• Operating lease: Typically for short-term usage. The lessor maintains ownership and responsibility for asset maintenance, but the lessee won't have an option to eventually purchase the asset at the end of the lease.
• Gross lease: The lessor covers all property-related expenses, such as maintenance, taxes, and insurance, while the lessee pays a single, fixed lease amount. A gross lease makes budgeting easier but can result in higher rents​.
• Triple net lease: The lessee is responsible for property taxes, insurance, and maintenance costs in addition to the rent. In a triple net lease, the base rent is typically lower because the lessee manages all the operating costs.
• Capital lease: A long-term lease in which the lessee assumes ownership responsibilities with the option to buy; it’s often recorded as an asset and liability on balance sheets (financial statements). A capital lease agreement is also known as a finance lease.
• Sale and leaseback: An asset owner—typically a company—can sell their property and then lease it from the new owner. A company may choose to do this in order to receive substantial funds from the sale while maintaining usage rights.

Why does a strong lease agreement matter?

A strong lease agreement is essential for lessors and lessees as it establishes clear terms that consider both parties, which is necessary for a legally binding partnership. An attorney can be an invaluable asset to ensure a strong lease. We can help you find an attorney who will create, revise, and customize a commercial lease for you.

Clarity and enforceability

A well-drafted lease agreement provides clear terms and conditions, reducing the potential for misunderstandings. It serves as a legally binding document that can dictate how courts proceed if disputes arise​. It clearly outlines the rights and responsibilities of both parties, protecting their interests and ensuring that both parties understand their obligations​.

Financial security

The agreement defines the rental amount, payment frequency, and any penalties for late payments. This ensures that the lessor receives timely compensation and the lessee understands their financial obligations​. It also includes details about security deposits, additional fees, and conditions under which these are returned.

Conflict resolution

Dispute resolution mechanisms—such as mediation or arbitration—included in the agreement offer a faster and less costly alternative to litigation​. It also specifies the conditions under which either party can terminate the lease, as well as other conditions that lessors and lessees can refer to when settling possible disputes.

Asset protection

An agreement that specifies maintenance responsibilities ensures that the property or asset is adequately cared for during the lease term and prevents potential misuse or damage. Although the law requires landlords (real estate lessors) to meet local building and housing codes, it's possible to assign some maintenance to the tenant in the lease agreement.

Flexibility and customization

Lease agreements can be customized to fit the specific needs of the lessor and lessee, including lease duration, renewal options, and special conditions​. They can include specific clauses—such as early termination options, buyout clauses, or rights of first refusal, which allow the lessee the first choice to renew the lease or not before the lessor can seek a new lessee.

Compliance and risk management

A comprehensive agreement ensures compliance with local, state, and federal laws. The lease can limit the liability of both parties by specifying conditions under which each party is responsible for damages or losses, reducing the risk of costly legal battles. It can require insurance coverage for certain risks, ensuring both parties are protected financially in case of accidents or damage.

FAQs

Can a lease agreement be terminated early?

Yes, either party can terminate an agreement early if one party violates the terms of the contract or early termination is granted in the terms of the agreement.

What happens if a lessee defaults on lease payments?

Usually, three months of missed payments will warrant a default. In that case, the lessor will likely repossess the asset. Failure to resolve the default can lead to evictions, lawsuits, collections, and judgments. This could impact your credit and ability to lease or buy in the future.

Can a lessee make changes to the leased property or asset?

Sometimes, a lessee can request that the lessor modify the property or asset. If the request is accepted, the lessee is free to make the agreed-upon changes. The lessor may also deny the request, meaning the lessee cannot make the requested modifications.

Is a landlord a lessor?

Yes, a landlord is a lessor of real estate property, either residential or commercial.