Owner Operator Lease Agreement: Fill & Download for Free

If under the lease agreement the lessor is entitled to take back the possession of the asset leased from the lessee - the arrangement is considered as operating lease. Operating lease is a genuine lease where ownership for tax and accounting purpose remains with the owner. When ownership remains with the owner for tax purpose then the lease is called tax oriented lease. Tax orientation has a significant importance in determining and measuring cash flow impact of lease transactions and their valuation. Operating lease is always a tax oriented lease. Under lease agreement lessor is required to maintain and service the leased asset. A common example is licensing agreement of flats in big cities. Under the agreement the landlord leases his (her) flat for eleven months for monthly rental renewable at the option of the landlord after the expiry of eleven months. The landlord bears the cost of maintenance and service (security, lift etc). An important feature of operating lease is - lease period is sufficiently less than the economic life of the asset. This means total lease rental recovered based on the lease period is substantially less than the cost of the asset.Example : Suppose in example 1 above, the cost of the car given on lease by X rental is ? 20 lacs. The economic life of the car is 8 years - implying that the car will create cash flow for next 8 years. Now, from the lease rental for 2 years total recovery will be Rs. 600,000 (Rs. 25000 X 12 X 2). In 2 years’ lease cost of car remains unrecovered. The economic life of the asset is far more so that the cost can be recovered by further leasing or selling the car. Hence, this is an example of operating lease.Significant features of operating lease1. Payments by way of lease rental over the period of lease are not enough to cover the cost of leased asset.2. The lesser generally takes back the possession of the asset on the expiry of the lease period.3. The lesser bears the cost of insurance, maintenance, tax etc. of the leased asset4. The lessee has the right to cancel the lease before the expiry of the lease term.5. The lessor remains the owner of the asset in the legal and economic sense (in substance).6. Operating lease is always a tax oriented lease.This answer is taken form India’s one of the best finance teacher CA Aaditya Jain Sir’s book.He is also faculty of ca Inter FM & ECO and CA Final SFM & FSCM.

These are the advantages of leasing.(1) Lease may be low cost alternative: Leasing is alternative to purchasing. As the lessee is to make a series of payments for using an asset, a lease arrangement is similar to a debt contract. The benefit of lease is based on a comparison between leasing and buying an asset. Many lessees find lease more attractive because of low cost. For example - you are transferred to another city for 6 months. For daily travel you need a car. If you buy car in your own name then as per Motor Vehicles Act you have to pay one time road tax and incur other expenses besides cost of car. You can always sell the car after 6 months before leaving. It may be economical to take a car on lease for 6 months as lease rental may be less than net cash outflow arising from difference between total cost of the car and sale value you realise.(2) Tax benefit: In certain cases tax benefit of depreciation available for owning an asset may be less than that available for lease payment. In other words, differential tax treatment between owning an asset and taking it on lease may result in a decision in favour of lease. For example - if a firm owns an asset, it gets tax saving for depreciation on book value as per the I-T law (in case of MAT, depreciation on the book value is as per the depreciation schedule of the Companies Act, 2013, based on useful life), but in case of lease rent entire lease rental is tax deductible. In some cases this differential tax treatment means a higher tax savings for lease, implying lease is a smarter decision subject to other factors.(3) Working capital conservation: When a firm buy an equipment by borrowing from a bank (or financial institution), they never provide 100% financing. Depending upon the firm’s credit rating bank may finance 75% or 60% (say) of total cost of equipment. The rest 25% or 40% (as the case may be), the firm has to bring in - the amount that the firm provides as down payment from its own source is called margin money. Margin money requirement naturally reduces firm’s working capital (and liquidity). In case of high value asset the amount may be substantial having an adverse impact on operation. But in case of lease one gets normally 100% financing in the sense that one needn’t bring in margin money generally for taking an asset on lease. This enables conservation of working capital.(4) Preservation of Debt Capacity: As per the accounting standard operating lease is not capitalised in the books of the lessee. Operating lease payment is treated as expenditure in the profit and loss account. Neither the asset taken on lease appears as asset nor does the liability representing present value of future lease payment (cost of leased asset) appear as liability in the balance sheet. That is, operating lease doesn’t have any balance sheet impact. So, operating lease does not matter in computing debt equity ratio. This enables the lessee to go for debt financing more easily. The access to and ability of a firm to get debt financing is called debt capacity (also, reserve debt capacity). Operating lease, if it is properly structured, can work efficiently as a substitute of debt though there may hardly be any difference between the two in respect of regular cash out flow; but at the same time it keeps the debt capacity in fact.However, it is to be noted the above preservation of debt capacity is not generally applicable for finance lease as the present value of future lease payment (cost of leased asset) appears as liability in the balance sheet of the lessee and to be duly considered in calculating debt equity ratio.(5) Obsolescence and Disposal: After purchase of leased asset there may take place technological obsolescence of the asset. That means a technologically upgraded asset with better capacity may come into existence after purchase. To retain competitive advantage the lessee as user may have to go for the upgraded asset. The obsolete old asset may fetch a small portion of the book value upon disposal resulting in capital loss. In case of cancellable operating lease the lessee can terminate the contract in such circumstances. However, it is to be kept in mind that where there is a possibility of technological obsolescence the lessor will cover the risk by fixing a higher lease rental.(6) Restrictive Conditions for Debt Financing: When a company takes loan to purchase equipment (say), in the loan agreement lender may impose several restrictions on the borrower company to protect his interest. Apart from creating charge on the equipment purchased ( primary security), lender may ask for collateral securities on other assets, like -mortgage of landed property, pledging fixed deposit receipts with the bank, asking for guarantor etc. The lender can impose other conditions too - like restriction on payment of dividend, putting lender’s representative on the board to ensure proper utilization of fund etc. In case of lease such tight conditions are not imposed as lessor remains the owner of the asset legally and he can recover the asset if the lessee fails to abide by the lease termsAbove answer is taken from ca final sfm faculty Aaditya Jain Sir books.

I once rented a house that was built behind another street-front house. We had to access it by using the front neighbour’s driveway (and he made it abundantly clear on move-in day that it was HIS driveway).The neighbour told us he had built the second house after he and his wife separated, so she could live there. He didn’t want to sell his house as part of the property settlement, so he subdivided the land instead and gave her the house at the rear. Since then, the wife had remarried and moved overseas and decided to lease the property via a real estate agency.While there, we often noticed lights on in our front garden that we hadn’t turned on. We searched and searched and could not find a switch that operated them. They were definitely not solar-powered lights.After about six months, the absentee owner switched to a new real estate office and someone from the new one came over to look around the house and do a new rental appraisal. She asked me for the key to the cellar.What cellar?There was a cellar under the house that was never listed in our lease agreement. We found out later that the front neighbour had the key and had been going in there at night (doing goodness knows what). He was the one who’d been turning on the garden lights from the switch inside the cellar.One of the reasons we never realised it was there is that cellars and basements are very uncommon in most parts of Australia; it just never occurred to us that we might have one. Apparently it went under the full length of the house and goodness knows if the neighbour could see into the house from down there.The whole thing creeped me out.Thankfully, the new realtor decided she could get triple the weekly rent I’d been paying. I had no problem refusing a new lease and moving on quickly.