Real Estate Terms

Lessor vs Lessee

A lessor is a property owner who rents their property to a tenant, while a lessee is a tenant who pays to rent the property. Each party must sign a contract outlining the terms of their lease agreement.

Real estate professionals must learn the difference between a lessor and a lessee before the exam. To fully understand how lease agreements work, you’ll need insight from trusted real estate experts. Luckily, we have years of experience that help us shed some crucial knowledge on this topic.

In this post, we’ll explain the differences between lessor vs lessee, give examples of how leases work, and cover the different lease types in real estate. Keep reading for a full breakdown of these key terms!

The Difference Between Lessor vs. Lessee Explained

To understand the difference between lessor vs. lessee, we must explain what each term means in real estate.

What Is a Lessor?

A lessor is a property owner who agrees to lease out their property to an individual, family, or business for a specific period of time.

Lessors can be either individuals or business entities. In any case, the lessor is the legal owner of the property.

What Is a Lessee?

A lessee is an individual, family, or business who rents property from a lessor. Lessees, often referred to as tenants, can live in or use the property as long as they abide by the terms of the lease agreement.

Lessees make a one-time payment or periodic lease payments to continue occupying the rented space.

Examples of the Differences Between Lessors vs. Lessees

Check out this helpful table for a breakdown of the differences between the lessor vs. lessee:

DefinitionA lessor is a property owner who leases their property to a person or tenantA lessee is a person or family who makes a payment or periodic payments to occupy a lessor’s property
Ownership StatusThe lessor is the legal owner of the propertyThe lessee has no legal ownership of the property
CompensationThe lessor receives the full lease amount in return for renting out their propertyThe lessee can occupy the property in exchange for making rent payments
Responsibility for MaintenanceThis depends on the terms of the lease agreement contractThis depends on the terms of the lease agreement contract
Responsibility for UtilitiesIt depends on the lease agreement contract, but the lessor typically does not pay for utilitiesIt depends on the contract, but the lessee typically pays for utilities
Possession of Property The lessor does not possess the property during the term of the leaseThe lessee possesses the property during the duration of the lease

What Does a Lease Agreement Include?

According to Forbes, a lease agreement should cover the following information:

  • Names of every tenant living on the property
  • Term of the lease  
  • Any limits of the lease
  • Cost of rent and payment schedule
  • Deposits and fees
  • Rules about pet ownership
  • Any other restrictions

What Are the Different Types of Leases in Real Estate?

There are four popular lease types that lessors can offer, including:

  1. Operating lease
  2. Capital lease
  3. Gross lease
  4. Net lease

Operating Lease

An operating lease allows the lessee to use a property without granting them ownership rights. This type of lease is popular for businesses renting workspaces.

Under an operating lease, the lessee must follow the terms of the rental agreement and leave the property in good condition. In these types of agreements, the lessor retains both the risks and benefits of ownership.

Capital Lease (Finance Lease)

A capital lease, or a financial lease, is an agreement where the lessee pays rent for a term and gains ownership rights at the end. In a capital lease agreement, the lessee assumes the risks and benefits of ownership.

Gross Lease (Full-Service Lease)

A gross lease is the most common option for tenants renting residential properties. Under a gross lease, the lessee pays one flat fee that covers both rent and expenses. These covered expenses typically include:

  • Property taxes
  • Utilities
  • Maintenance

If any repairs were needed to maintain the property, the landlord would be responsible for covering this cost.

Net Lease

Net leases are commonly used for commercial real estate. A net lease is a flexible lease agreement where the tenant pays a rent fee plus another operational cost fee.

A net lease is typically lower than a gross lease, but the lessee must pay for the following items separately:

  • Property taxes
  • Insurance
  • Utilities
  • Maintenance
  • Other operational costs

There are multiple types of net lease agreements, each specifying what the lessor vs. lessee is responsible for paying.

Frequently Asked Questions

Let’s go over some frequently asked questions that students have about leasing in real estate.

Are There Other Lease Types in Real Estate?

While we went over some of the most frequently used lease types, other variations exist, including:
– Modified gross leases
– Single net leases
– Double net leases
– Triple net leases
– Bond leases

What’s the Difference Between a Lessor vs. a Landlord?

Many people use the terms “lessor” and “landlord” interchangeably. While they have similar meanings in real estate, the term “lessor” is more general and can apply to other industries.

For example, if a car dealership leases a vehicle to a lessor, the dealership is referred to as the lessor, not the landlord.

Capital Real Estate vs. Residential Real Estate: What’s the Difference?

Capital real estate refers to properties used for business and profit generation. Residential real estate refers to properties used for housing.

What to Know Before the Real Estate Exam

A lessor is an owner who rents their property out to tenants, while a lessee is a tenant who signs a lease to occupy the property. Because leasing is a popular way for families to find housing and businesses to find office space, we must understand how lease agreements work before the exam.

Now that you’ve read this article, you should be an expert on the differences between lessors vs. lessees. But of course, this isn’t all you’ll need to know the ace the real estate test!

Study key terms and concepts using our online Real Estate Flashcards and head into exam day feeling confident!

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