Lessor vs. Lessee: Who is Who in Real Estate?

Leasehold estates are common and offer an accessible way to secure a residential or commercial real estate space without a large upfront investment. They are created through a lease contract or rental agreement between two parties—the lessor and the lessee.

While these terms may seem confusing, understanding them is essential for anyone preparing for a real estate exam. Let’s break down the lessor vs. lessee distinction to clarify their roles, rights, and responsibilities.

Who Is the Lessor in Real Estate?

In real estate, a lessor is the owner of an asset, granting a lease agreement to another party, allowing them to use the property for a specified period. For example, a property owner who leases out their home becomes the lessor, commonly referred to as a landlord. The lease agreement defines both parties’ responsibilities, including periodic payments that the lessee pays to the lessor for property use.

Lessors can be individuals or entities such as corporations or government agencies. Although we often think of residential property, lessors may own and lease various property types, including land, residential units, and commercial real estate spaces.

What Is the Meaning of Lessee in Real Estate?

The lessee, commonly known as the tenant, is the party that leases the property from the lessor, gaining the right to use it for a specified duration of the lease. In exchange for this right, the lessee agrees to make periodic payments to the lessor and uphold the terms outlined in the lease contract. These payments may appear in the financial statements of businesses if the property is commercial real estate, affecting their expenses and net income.

The lessee might lease a property for personal use or as part of a finance lease agreement in a business context, where the lessee is responsible for specific conditions and expenses related to property use.

Rights of the Lessor in a Lease Agreement

The lessor or landlord’s rights vary from state to state. Here are the more common:

• They are entitled to regular payments for a specified period, which gives the tenant the right to use their property.
• Lessors can raise rents as defined in the lease agreements, for example, with notice and if both parties agree.
• If tenants do not pay the rent, the landlord has the right to evict them. (The technicalities of this process vary by state.)
• The right to charge tenants a security deposit to cover property damages and unpaid rent in some cases.

But there are limits to their rights. Lessors are not allowed to:

• Denying a lease based on discrimination: The Fair Housing Act and other state laws forbid landlords from refusing to lease to members of a protected group; this means they cannot discriminate based on characteristics such as color, origin, disability, gender, and sexual orientation.

• Enter the rented property without proper notice: As they grant the possession and use of the property to the tenant, they are no longer entitled to enter it unannounced, unless it’s in case of an emergency like a fire.

• Evict without cause: To evict a tenant, they must have very solid reasons and make the process through legal channels.

• Raise the rent without notice: The rent must be raised on the terms specified in the lease contract. For example, if it says a previous notice of 30 days is needed, then they must comply.

Lessor’s Responsibilities in a Lease Agreement

Though the responsibilities may vary depending on state regulations, the lessors or landlords are usually accountable for maintaining their property for rent in a fit-to-live condition. For example, it must have electricity and proper plumbing. If an issue renders it unlivable, they must fix it. Other responsibilities include keeping it safe from hazards and crime. Summing up, their general obligations are:

• Ensure the rental property is clean and ready when new tenants move in.
• Maintain the property in habitable condition.
• Keep all vital services working (electricity, plumbing, heat, etc.)
• Fix environmental hazards that could cause accidents or endanger tenants.
• Take security precautions to reduce crimes in or around the premises.
• Comply with the lease agreement specifications, including early termination clauses, if applicable.
• Do not breach the rules related to the security deposit.

Lessee’s Rights in a Lease Agreement

Once a lease is signed, the lessee has the right to use and enjoy the place peacefully as long as they fulfill their payment obligations and follow the rules laid out in the lease agreement. However, there may be some conditions or limitations to that enjoyment if they’re specified in the contract. For example, they could have to pay a security deposit for the rent.

Here are the usual rights of lessees (they may vary depending on the state):

• Be free from discrimination: As we said before, the Fair Housing Act forbids landlords from discriminating against tenants and denying them rent based on protected characteristics like skin color or place of origin.
• Rent a place in habitable conditions: Their rented property must follow building codes and health and safety standards. It also maintains vital working services like electricity and reliable heating.
• Right to their privacy: Landlords cannot disturb a lessee’s privacy by showing and entering without proper notice in advance, except in an emergency.
• Advance notice of eviction: The eviction process may change by state, but the tenant generally has the right to an advance notice before being required to leave the rent.
• Right to a Disability Accommodation: Landlords must accommodate the place regarding the tenant’s disabilities, if any, and allow them to make reasonable modifications if needed, only if they don’t make the space unusable for the next tenants.

For lessees in commercial real estate, these obligations may also appear on their financial statements, impacting their income and operating expenses. Payments to the lessor can be significant, so lessees in a commercial lease often weigh these costs carefully in their income statements.

Lessee or Tenant Obligations

As the lease is a bilateral contract, tenants also have obligations, including complying with every condition they agreed with the landlord. Here are the general obligations for tenants (they can vary by state):

• Comply with the lease terms
• Pay the fixed rent at due time
• Pay a security deposit if it’s specified in the lease contract.
• Keep the property in good condition.
• Allow the landlord to inspect the unit at reasonable times, always after proper notice.

Types of Lease Agreements: Understanding the Options

Lease agreements come in various forms, tailored to the needs of the lessor and lessee. These agreements define the terms under which a lease asset is used, clarifying the roles and responsibilities of both parties. Whether short-term or long-term, understanding the different types of leases helps real estate professionals guide clients in choosing the best arrangement.

1. Operating Lease

An operating lease is a short-term arrangement where the lessor retains ownership and is responsible for maintaining the lease asset. The lessee has the right to use the asset for the lease term but won’t have the option to purchase it afterward. This type of lease is common for equipment rentals and temporary commercial space usage.

2. Gross Lease

In a gross lease, the lessor covers all property-related expenses, including maintenance, taxes, and insurance. The lessee pays a single fixed rent, making this option predictable for budgeting. While convenient, the total rent may be higher to account for the lessor’s responsibilities.

3. Triple Net Lease

Under a triple net lease, the lessee is responsible for property taxes, insurance, and maintenance costs in addition to rent. While the base rent is typically lower, the lessee assumes greater responsibility for managing the property.

4. Capital Lease (Finance Lease)

A capital lease, also known as a finance lease, is a long-term agreement where the lessee assumes ownership-like responsibilities. The lessee can record the lease as both an asset and a liability on their financial statements, and they often have the option to purchase the property at the end of the term.

5. Sale and Leaseback

In a sale and leaseback arrangement, a property owner sells their asset to another party and then leases it back. This provides the seller (now the lessee) with immediate funds while retaining usage rights. This strategy is often employed by businesses seeking to improve cash flow without sacrificing operational needs.

Why a Strong Lease Agreement Matters

A well-crafted lease agreement benefits both parties by clarifying responsibilities and protecting the leasing agreement, the lessee and lessor.

1. Clarity and Enforceability
   Clear terms reduce misunderstandings and ensure legal protection for both parties.
2. Financial Security
   The agreement ensures the lessor receives timely payments and the lessee understands their obligations, including rent, fees, and deposits.
3. Conflict Resolution
   Mechanisms like mediation or arbitration resolve disputes faster and reduce legal costs. Conditions for early termination are also included.
4. Asset Protection
   Specifying maintenance roles protects the lease asset and ensures compliance with building codes.
5. Flexibility and Compliance
   Lease agreements can include renewal terms, early termination clauses, and customization while meeting legal requirements to manage risks effectively.

Summing-up: Lessor vs. Lessee, the Difference

In conclusion, understanding the dynamics of lessor vs. lessee is relatively easy if you do it this way: the lessor is the landlord, and the lessee is the tenant. Both have rights and obligations, all accorded in the lease agreement and regulated by federal and local laws. They mainly include following the terms of the contract regarding aspects such as the duration of the lease, fixed payments, the conditions the property must have, utilities, and notices before eviction.