The difference between a lessor and lessee in real estate
In any lease agreement, there are two core parties: the lessor and the lessee. The lessor is the party that owns the asset and grants the right to use it. The lessee is the party that pays to use that asset for a set period under agreed terms.
This relationship applies across many lease types, including commercial real estate, office space, equipment, vehicles, and even residential property. While the basic structure is simple, the responsibilities of each party can differ based on the lease terms, the asset involved, and the accounting treatment required under standards such as ASC 842.
Understanding the difference between a lessor and a lessee helps organizations manage lease obligations more accurately, assign responsibilities clearly, and maintain stronger lease accounting processes.
What is a lessee?
A lessee is the person or organization that pays to use an asset owned by someone else. In a lease agreement, the lessee is granted the right to use the leased asset for a specified period of time in exchange for regular payments, typically referred to as rent or lease payments.
For example, a company renting office space is the lessee. A business leasing forklifts for warehouse operations is also the lessee. In both cases, the lessee uses the asset but does not own it.
What is a lessor?
A lessor is the person or organization that owns an asset and leases it to another party. In exchange for lease payments, the lessor gives the lessee the right to use that asset for a specific period under the lease agreement.
For example, a landlord renting office space to a tenant is the lessor. A financing company that leases vehicles or equipment to a business is also a lessor. In each case, the lessor keeps ownership of the asset unless the agreement states otherwise.
Who is the lessor and who is the lessee in a lease agreement?
In simple terms, the lessor owns the asset and the lessee pays to use it.
A good way to think about it is this:
- The lessor is the owner or provider
- The lessee is the user or tenant
For example, in an office lease, the building owner is the lessor and the business renting the space is the lessee. In an equipment lease, the leasing company is the lessor and the company using the equipment is the lessee.
Key responsibilities of a lessor
Depending on the lease terms, a lessor may be responsible for:
- Granting the legal right to use the asset
- Maintaining ownership of the asset
- Setting lease terms and collecting payments
- Handling certain maintenance, taxes, or insurance obligations
- Classifying the lease correctly for accounting purposes
Key responsibilities of a lessee
Depending on the lease terms, a lessee may be responsible for:
- Making lease or rent payments on time
- Using the asset according to the agreement
- Maintaining the asset or returning it in required condition
- Covering certain operating costs, such as utilities, taxes, or repairs
- Recording lease obligations correctly for accounting and reporting
The exact responsibilities of each party depend on the lease agreement. In some leases, the lessor handles more property-related obligations. In others, the lessee may take on a larger share of costs and day-to-day responsibilities.
Common types of leases for lessors and lessees
Lessors and lessees can enter into many types of lease agreements. The terms and responsibilities may vary depending on the asset and the structure of the lease.
Common examples include:
Real estate leases
These can include commercial office leases, retail leases, industrial leases, and residential leases. In these agreements, the lessor owns the property and the lessee pays for the right to occupy or use it.
Equipment leases
Businesses often lease machinery, medical devices, printers, or warehouse equipment instead of buying them outright. In this case, the equipment owner or leasing company is the lessor, and the business using the equipment is the lessee.
Vehicle leases
A vehicle lease allows an individual or business to use a car, truck, or fleet vehicle for a set term. The dealership, financing company, or asset owner is the lessor, while the driver or company using the vehicle is the lessee.
Operating and finance leases
From an accounting perspective, leases are often classified as operating or finance leases. For lessors, lease classification may include operating, sales-type, or direct financing leases under ASC 842. For lessees, lease classification generally falls into operating or finance categories.
No matter the lease type, it is important to understand which party owns the asset, which party controls its use, and which responsibilities belong to each side under the agreement.
Lease accounting considerations for lessors vs lessees
Although different types of leases exist, such as finance and operating leases, the obligations have one thing in common. When it comes to lease accounting, leases must be reported accurately to meet regulatory compliance standards.
Lessor accounting obligations
Accurate accounting is vital to the health of any organization. As a lessor, accounting accuracy requires correctly classifying your leases, whether as sales-type, direct financing or operating.
Under lease accounting standard ASC 842, ownership transfers to the lessee for accounting purposes for sales-type and direct financing leases. Sales-type leases require lessors to derecognize the underlying asset and instead recognize the lease’s net investment, selling profit or loss arising from the lease, and track the balance and interest income over time. Lessors record direct financing leases in a similar manner but defer the asset’s profit or loss.
Operating leases give the lessee the right to use the asset but not ownership of it. Therefore, lessors record the asset, its related depreciation and lease payments in the books.
Lessee accounting obligations
Lessees must classify their leases as either finance or operating under the ASC 842 lease accounting standard. Both types of leases must appear in the organization’s balance sheet unless the term is 12 months or less, which is considered a short-term lease. For operating leases, lessees are expected to record payments as operating costs on the organization’s income statement.
Impact of ASC 842 commercial lessors and lessees
How lease agreements are presented on balance sheets has changed for both lessors and lessees under ASC 842. Lessees now need to list all leasing obligations, including operating leases, on the balance sheet, categorizing them as either operating or finance leases. Lessors, who were already classifying leases, are less affected. Accurate classification and accounting are essential, and lease management software can assist in meeting these new requirements.
Whether you are a lessor or a lessee, using a robust software solution like Visual Lease can help maintain accurate lease accounting and protect the financial health of your business.
