Lease vs. Rent

Origin: Business Dictionary

By: Jeffrey Glen

When purchasing something is not quite possible (or desired) the option for many individuals and companies comes down to leasing or renting. While both have similarities, getting access to an asset for a limited period, there are significant differences as well. This article will help you understand those differences when your decision to lease vs. rent comes up.

Leasing

A lease is a contract to rent an asset, be it land, a building, or machinery, for a set period of time and for set payment terms. Leases often come with many conditions in terms of the allowed use of the asset and even required maintenance terms.

A typical lease is often long term, ranging from 1 year to as many as 10 or 20 years. Significant penalties can be incurred by either party, the lessor (owner of the asset) or the lessee (user of the asset), in the event that either party violates the lease.

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It is also not uncommon for the asset to revert to the lessee at the end of the lease automatically or for what is termed a ‘bargain purchase option’ where the asset can be bought for significantly less than it is worth. This means that once the lease runs its course you have effectively bought the asset, though when considering the lease payments often for far more than it was actually worth.

From an accounting and tax perspective leases typically fall into two main categories, operating leases and capital leases. If the lease terms meet certain criteria the lease will be considered capital, including; 1) the value of the lease payments makes up most of the fair market value of the asset, 2) the life of the lease makes up most of the effective useful life of the asset, and 3) there is a bargain purchase option.

Capital leases require you to record the leased asset as a fixed asset on your financial statements and also record the lease obligation as a liability. Over time the value of the asset is amortized and the lease obligation decreases through payments made.

An operating lease has no such requirement and you can simply expense the lease payments each time they are made, for accounting and tax purposes.

Rent

Renting typically involves a shorter time period, often 1 year maximum, with the option to extend after the term at the discretion of both parties. Rentals are more suited to the temporary use of assets (land, buildings, or machinery) when the expectation is that it will not be needed long term. Rental contracts are generally far more casual than lease agreements, where a formal agreement with many terms will be drawn up.

Alternatively, if the cost of renting/leasing the asset is high it can be rented for a short period only when absolutely needed and then returned. Often this happens with construction work, where a very expensive piece of equipment (i.e. a crane) is needed for a relatively short time period but not afterwards. There’s no need to buy the asset or even lease it for several years, so a short rental period is appropriate.

Rental costs are always expensed on the income statement for both accounting and tax purposes.

Lease vs. Rent

The decision to lease vs. rent really depends on what you need. If the asset is integral to your business and you need it there all the time then leasing is your best option. The security and guarantee provided by a lease is important, and it ensures your business has what it needs. For short term periods where you don’t need an asset in your business year round then renting is likely a better option. Renting may cost more over that short term period but the total cost to you will be lower since you won’t have the asset for many years.

Other areas where rentals work out are in industries that are rapidly evolving technology wise. In some industries assets become outdated within 1 or 2 years, and a lease could leave you holding outdated assets for 5 or 10 year terms. Ultimately the decision to lease or rent depends on your needs and your industry.

Objection! Confusing courtroom jargon made clear

Origin: BBC Radio 4

Are you confounded by courtroom communication and longing to learn some legal lingo?

All professions, industries and many other specialist groupings have their own codes, languages and acronyms which can exclude outsiders – intentionally or otherwise. Lucy Read is a family law barrister and chair of The Transparency Project. She joined Michael Rosen and Dr Laura Wright on Radio 4’s Word of Mouth to discuss the language of the courtroom.

Here’s Lucy’s guide to some basic terms…

1. Barristers and solicitors

All barristers and solicitors are lawyers, but a lawyer can’t be both – they are either one or the other.

2. Counsel / Queen’s Counsel (QC)

Counsel is another name for a barrister. When the judge asks for “counsel only” it means she wants to see only the lawyers without their clients. Queen’s Counsel (QC) is a senior barrister who has been given the rank of “QC” as a mark of excellence. Also called a silk (they “take silk” – something to do with the special garments worn by QCs). Any barrister who isn’t a QC is a “junior barrister” no matter how senior they are. Barristers who are experienced but not senior enough to be a QC are called a “senior junior”. Yes, daft isn’t it?

3. Chambers

Chambers are what the rest of the world call offices. Mainly different because barristers don’t (generally) work in a “firm” or company, but are independent sole traders who club together to pay for a room in chambers and share clerks (employed staff who receive enquiries, get in work and allocate it).

 

4. Skeleton

No, it’s probably not what you’re thinking. Skeleton is a written legal argument in outline form.

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5. Submissions

Submissions are the lawyers’ speeches at the end of the case (this is sometimes done in writing).

6. Issue

A phrase used by lawyers to mean the things that are in dispute – but only the ones that actually need to be decided for the judge to make a decision. (Cue affronted client when told that something that is very important to them is “not an issue” and hurried explanation that what is important to the client is not always relevant for the judge…).

7. Ex parte

This Latin phrase means “in the absence of a party” and applies in family cases mainly when one party goes to court to get a domestic violence injunction in place before the other party is told (because if warned in advance they might take unwanted action). An “ex parte” hearing also includes a hearing that the other party is aware of but excluded from, such as in a national security context.

8. Without prejudice

This relates to private correspondence and negotiation that the judge should not be told about until after they have decided the case.

9. Prima facie

More Latin. Prima facie means “on the face of it”. Someone who has a “prima facie case” is someone who has presented enough evidence for a case to be looked at, but doesn’t mean the case will necessarily be heard in full once the details have been thoroughly scrutinised.

10. Housekeeping

Housekeeping refers to the administrative tasks that need to be sorted out at the start of a hearing, such as which order are the witnesses going in and checking everyone has the appropriate documentation.

 

11. Part-heard

Part-heard is when a hearing breaks off to a later date half way through the evidence. When the case is part-heard the same advocates and judge have to continue the case until the evidence is finished and the judgment given – which means lots of diary juggling.

12. My learned friend

“My learned friend” is what barristers call one another in court when they have forgotten the other one’s name.

13. My friend

Simply “My friend” is what barristers call solicitors when they are in pompous git mode (making the point that the solicitor isn’t a barrister).

14. Disguised compliance

Disguised compliance is a complicated term social workers use when they think parents are lying but can’t prove it (i.e. when parents disguise the fact they disagree there is anything wrong with their parenting by superficially doing what they are asked to in order to get social workers off their back). “Putting on a show” or “game playing” would work just as well.

15. Paramountcy principle

Paramountcy principle means that a child’s welfare trumps everything else.

16. Paginated bundle

The world “paginated” refers to numbering the pages of a document, and a “bundle” is what lawyers call the files of court papers, put in order and separated into numbered sections so that the judge, lawyers and witnesses can all find the same documents in the same place (in theory). A “paginated bundle” is therefore simply the files of court papers, with page numbers, and separated into numbered sections.

To learn more about the language of the courtroom see Lucy Read’s website, Pink Tape.