Hotel Business Lease Agreements PDF

# What Is a Lease Agreement? A lease agreement is a contract between a landlord and a tenant that states what the tenant will pay monthly for rent and for how long. Lease agreements, like many contracts, tend to intimidate some people because much of the language in the contract can be confusing. H...

# What Is a Lease Agreement? A lease agreement is a contract between a landlord and a tenant that states what the tenant will pay monthly for rent and for how long. Lease agreements, like many contracts, tend to intimidate some people because much of the language in the contract can be confusing. However, if you understand what is included in a lease agreement, you can avoid unnecessary disagreements or expenditures during or after your lease is over. ## Contents of a Lease Agreement The lease agreement outlines and details the obligations and responsibilities of the landlord (lessor) and the tenant (lessee). It explains what the landlord and tenant have agreed upon in regards to length of the lease, how much the monthly rent will be, and who will be responsible for upkeep of the property. It is important for tenants to understand that a lease agreement can be altered prior to being signed. If there is something that you do not understand or agree to, or if there is a provision that needs to be altered, discuss it with the landlord prior to signing the lease. ## A Legal, Binding Document Once your lease agreement is signed, it governs what the landlord and the tenant can and cannot do during the term of the lease. The lease agreement acts as a legal, binding contract between the landlord and tenant and will be used as such by the court if any legal proceedings arise between the two parties. If there is more than one tenant responsible for the lease, a landlord can enforce the lease against all the tenants should the need arise, so it is important for everyone involved to understand what their responsibilities are under the terms of the lease. ## Verbal Lease Agreements While most lease agreements are written, there are verbal lease agreements that can be enforced as oral contracts; however, it is important to note that not all states allow verbal residential lease agreements, and verbal commercial agreements are prohibited in every state. Tenants with verbal residential lease agreements are protected by tenants-rights laws that exist in each state. The complexity of commercial leases makes it nearly impossible to substantiate verbal agreements in court and that is why they are not allowed. # Advantages of LEASE AGREEMENT ## Balanced Cash Outflow The biggest advantage of leasing is that cash outflow or payments related to leasing are spread out over several years, hence saving the burden of one-time significant cash payments. This helps a business to maintain a steady cash-flow profile. ## Quality Assets While leasing an asset, the ownership of the asset still lies with the lessor, whereas the lessee just pays the rental expense. Given this agreement, it becomes plausible for a business to invest in good-quality assets which might look unaffordable or expensive otherwise. ## Better Usage of Capital Given that a company chooses to lease over investing in an asset by purchasing, it releases capital for the business to fund its other capital needs or to save money for a better capital investment decision. ## Tax Benefit Leasing expenses or *lease payments* are considered as operating expenses and hence, of interest, are tax-deductible. ## Off-Balance Sheet Debt Although lease expenses get the same treatment as interest expenses, the treatment of lease is different from debt. Leasing is classified as an off-balance sheet debt and doesn't appear on the company's balance sheet. ## Better Planning Lease expenses usually remain constant over the asset's life or lease tenor or grow in line with inflation. This helps in planning expenses or cash outflow when undertaking a budgeting exercise. ## Low Capital Expenditure Leasing is an ideal option for a newly set-up business, given that it means lower initial cost and lower CapEx requirements. ## No-Risk of Obsolescence For businesses operating in the sector where there is a high risk of technology becoming obsolete, leasing yields great returns and saves the business from the risk of investing in a technology that might soon become outdated. For example, it is ideal for the technology business. ## Termination Rights At the end of the leasing period, the lessee holds the right to buy the property and has a *termination option* for the leasing contract, thus providing flexibility to the business. # Disadvantages of Leasing ## Lease Expenses The treatment of lease payments is as expenses rather than as equity payments towards an asset. ## Limited Financial Benefits If paying lease payments toward land, the business cannot benefit from any appreciation in the value of the land. The long-term lease agreement also remains a burden on the business as the agreement is locked and the expenses for several years are fixed. In a case when the use of an asset does not serve the requirement after some years, lease payments become a burden. ## Reduced Return for Equity Holders Given that lease expenses reduce the net income without any appreciation in value, it means limited returns or reduced returns for an equity shareholder. In such a case, there is no achievement of the objective of wealth maximization for shareholders. ## Debt Although a lease doesn't appear on a company's balance sheet, investors still consider long-term leases as debt and adjust their valuation of a business to include leases. ## Limited Access to Other Loans Given that investors treat long-term leases as debt, it might become difficult for a business to tap capital markets and raise further loans or other forms of debt from the market. ## Processing and Documentation Overall, entering into a lease agreement is a *complex process* and requires thorough documentation and proper examination of an asset being leased. ## No Ownership At the end of the leasing period, the lessee doesn't become the asset owner though quite a good sum of payment is being done over the years towards the asset. ## Maintenance of the Asset The lessee remains responsible for the maintenance and proper operation of the asset being leased. ## Limited Tax Benefit For a new start-up, the tax expense is likely to be minimal. In these circumstances, no added tax advantage derives from leasing expenses. ## Conclusion To summarize, lease finance is appropriate for an individual or business which cannot raise money through other means of finance like debt or term loans because of the lack of funds. The business or lessee cannot even arrange the down payment money to raise debt. The lease works best for him. On the other hand, the lessor, who wants to invest his money efficiently, becomes the financier for the lessee and earns the interest.