Lessor vs Lessee: a simple guide

Any time you rent or lease something — an apartment, house, car, or even a bouncy castle — you'll need to sign a contract. The agreement will probably include lots of legal language and maybe a few unfamiliar terms like lessor and lessee. But what do they mean? Let's break down lessor vs lessee so your next rental is an easy affair!

What is a lessor?

Any lease or rental agreement has two parties — the lessee and the lessor. Sometimes, a cosigner may join the lease, too. 

The lessor is the person who owns the asset. They can be an individual or a business entity, like a corporation. They earn money through lease payments by renting the asset to someone else. The money earned can be used to cover debt payments, other expenses, or as income. 

So, let's look at an example. Assume you have a spare bouncy castle 🏰 lying around (who doesn't, right?). You decide you'd like to earn a little extra money, so you rent it out to other parents to use for birthday parties. Since you're the one who owns the bouncy castle, you are the lessor. 

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What is a lessee?

A lessee is someone who rents or leases property for their use. They don't own the property, but by renting it, they can use it for a specific period. Lessees can be individuals or business organizations.

Let's say you're a parent, and your kid has an upcoming birthday party. You know your kid loves bouncy castles, so you rent one. Since you're renting the bouncy castle in this scenario and don't actually own it, you're the lessee! Once the lease starts, you can use the bouncy castle for the party. After the lease ends, you'll return it to the lessor.

Why you need to know what a lessor and lessee are

So, why does knowing the difference between lessor and lessee matter? Well, whenever you enter into a rental or lease agreement, you want to understand your rights and responsibilities for the property. Your contract will describe those rights and obligations in terms of the lessor and the lessee.

Rights of a lessor

Every rental contract is different, but there are a few rights and responsibilities that apply to lessors in any lease.

The first is the right of ownership. While the lessor gives up the right to use the property during the length of the lease, they don't give up ownership. They remain the owner unless they decide to sell their property. Some leases may include a purchase option, which allows the lessee to buy the asset at the end of the lease term if they like. However, not every lease will include that option.

Another right of lessors is collecting regular payments. The lessee agrees to pay the lessor to use the property during the lease term. If the lease is short — like renting a bouncy castle for a weekend — the lessor may request an upfront payment and deposit. However, longer leases that extend months or years usually require ongoing weekly, monthly, or annual payments. If the lessee fails to pay, the lessor may take back the property. 

While the lessor loses the right to use the property during the lease term, that doesn't mean they can't check on it occasionally. So, if you decide to extend your bouncy house lease for a month, the lessor might decide to check its condition. However, they can't show up unannounced — instead, they'll need to contact you and get permission to see it. If the bouncy house needs maintenance, the lessor will inform you and arrange repairs. 🔧

If the lessee returns damaged property to the lessor, they're usually responsible for repair costs. Severe damage may require the lessor to file a claim with their property insurance provider. So, let's say your kid decides to draw a picture with markers in the bouncy house. A little scrubbing and cleaning will probably remove your kid's artwork, but the lessor might charge you a small fee for the extra trouble. However, the lessor would file a claim with their insurer if lightning strikes the bouncy house and it catches on fire (worst case, right?). 

Rights of a lessee

Once a lease begins, the lessee receives the right to use and enjoy the lessor's property. That right continues until the lease ends unless either party fails to adhere to their responsibilities or the property suffers irreversible damage. For instance, if you forget to pay your rent on the bouncy house, the lessor might decide you've broken the lease and ask you to return it.

Lessees have the right to a safe, usable asset. If they receive damaged property from the lessor, they can request that the lessor fix it. If something happens to the property's structural integrity during the lease, they can notify the lessor of its repair needs.

Lessees are responsible for maintaining the property's general condition during the lease. If they break or damage the property, they must fix it or pay for the repairs. Lessees can't depreciate property for tax or accounting purposes. Instead, the lessor retains the right to depreciation. 

If the lease includes a purchase option, the lessee may buy the property from the lessor. They must follow the lease requirements to start the purchase process, which might include notifying the lessor by a specific day and paying a certain amount. Once a lessee buys the property, they become the new owner, and the lessor's rights end.

Where lessor and lessee fit in your life

We all play the roles of lessor and lessee in different parts of our lives. Maybe your four-year-old no longer needs a crib and most of their baby gear 👶 so you rent it out to your friend with a newborn baby. You'd be the lessor, while your friend is the lessee. Deciding to lease the items rather than sell them ensures you can still use them at the end of the lease term, like, for example, if you and your partner choose to have another kid.

Another example is an apartment lease. You'll sign a lease agreement whenever you rent a house, condo, apartment, or other property. If you rent the place for your use, you are the lessee. The property owner is the lessor.

Sometimes, drivers decide to lease a car rather than buy it outright. Leasing a vehicle might mean lower car payments, and at the end of the lease, the driver can turn the vehicle in and get a newer model (or purchase the leased car if the agreement includes a purchase option). The car dealership or manufacturer is the lessor, and the driver is the lessee.

Businesses often use lease agreements to obtain machinery, equipment, or office space. For instance, one company might lease office space from a commercial property owner. The company renting the property to use is the lessee, while the actual owner is the lessor. 

Lessor and lessee: mystery unraveled

There you have it! Now you know exactly what a lessor and lessee are, so the next time you're involved in a rental agreement, you won't have any trouble deciphering those terms. And remember, reading and understanding rental contracts is crucial to avoid any unwelcome surprises. 

Greenlight® has tons of helpful articles on topics you care about — personal finance, saving and budgeting, and parenting! Explore the Greenlight Learning Center and demystify other financial terms and phrases, like semi-monthly vs. bi-weekly pay, “bang for your buck”, and "bring home the bacon"!