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What is the Difference between lessor and lessee?
a lessor is the owner, the one who borrows someone something and the lessee is the user, the borrower. I do understand that you may be trying to assist ?students, in your responses - but no-one...can 'borrow' someone, something!! Students trying to find answers, should not really use these forums sometimes, unless they already know what they know, but just want confirmation,
Equipment Leasing?
Equipment Lease(Download)This Equipment Lease ("Lease") is made effective as of ____________ (Date), by and between _________________ ("Lessor") and _____________________ ("Lessee"). IThe agreement of the parties is as follows:1. Equipment subject to Lease. Lessor shall lease the Equipment (“Equipment”) listed in Exhibit 1.2. Payment Terms. The Lessee shall make ___ payments of $________, for a total amount of $________. Payments shall be due on the first day of each month, with the first payment due on __________________. The lease payments shall be due without further notice to Lessee of any payment being due.3. Late Charge. A late charge of 5% of the payment shall be due if any Lease payment is not received within 10 days of the due date. In addition, interest will be charged at the rate of 1.5% per month, or 18% per year, on any unpaid balances.4. Insufficient Check Charge. Lessee shall be charged $25 for each check that is returned to the Lessor for lack of sufficient or collectible funds or for any other reason whatsoever.5. Security Deposit. Lessee shall pay a security deposit of two payments or $ _______, at the time this Lease is signed. This deposit will be returned to the Lessee at the termination of this Lease, subject to the option of the Lessor applying it against Lease charges and damages. Any amounts refundable to the Lessee shall be paid at the time this Lease is terminated. The security deposit shall bear interest at an annual rate of 6% from the date paid to the Lessor until the date refunded, based on the total amount of the security deposit.6. Lease Term. This Lease shall begin on the above effective date and shall terminate on ______________ (Date), unless otherwise terminated in a manner consistent with the terms of this Lease.7. Location or locations of the Equipment. The equipment shall be located at ____________________________________________________________________during the lease term, and shall not be removed from that location without the Lessor's prior written consent.8. Operation and Care of Equipment. The equipment must be used and operated in a careful and appropriate manner. Its use must comply with all laws, ordinances, and regulations relating to the possession, use, or maintenance of the equipment, including registration and/or licensing requirements, if any.9. Maintenance and Repair. Lessee shall maintain at the Lessee's cost, the equipment in good repair and operating condition, allowing for reasonable wear and tear. Such costs shall include labor, material, parts, and any similar items.10. Alternations. Lessee shall make no alterations to the equipment without the prior written consent of Lessor. All alterations shall be the property of Lessor and subject to the terms of this Lease.11. Right of Inspection. Lessor shall have the absolute right to inspect the Equipment during Lessee's normal business hours.12. Equipment Return at the end of the Lease. At the end of the Lease term, the Lessee shall be obligated to return the equipment to the Lessor at the Lessee's expense.13. Renewal Option of the Lessee. If Lessee is not in default upon the expiration of this lease, the Lessee shall have the option to renew this Lease for a similar term on such terms as the parties may mutually agree upon at the time of such renewal, the end of the Lease period covered in this Agreement.14. Purchase Option. If Lessee is not in default under this Lease, the Lessee shall have the option to purchase items of equipment at the end of the lease term for the price specified for such items of equipment in the attached Exhibit 1. Lessee shall exercise this option by providing written notice to the Lessor of such intent at least 30 days prior to the end of the lease term.15. Equipment Acceptance by Lessee. Lessee shall inspect each item of equipment delivered pursuant to this Lease. The Lessee shall immediately notify the Lessor of any discrepancies between such item of equipment and the description of the equipment in the Equipment Schedule. If the Lessee fails to provide such notice before accepting delivery of the equipment, the Lessee will be conclusively presumed to have accepted the equipment as specified in Exhibit 1.16. Ownership and Legal Status of Equipment. Equipment will be deemed to be personal property, regardless of the manner in which it may be attached to any other property. Lessor shall be deemed to have retained title to the equipment at all times, unless the Lessor transfers the title by sale. The Lessee shall immediately advise the Lessor regarding any notice of any claim, levy, lien, or legal process filed or issued against the equipment.17. No Warranty. Lessor makes no warranties, express or implied, as to the equipment leased. Lessee assumes the responsibility for the condition of the equipment.18. Risk of Loss or Damage and Insurance. Lessee assumes all risk of loss or damage to the equipment from any cause, and agrees to return it to the Lessor in the condition received from the Lessor, with the exception of normal wear and tear, unless otherwise provided in this Lease. Lessee shall provide evidence of insurance of the equipment and make Lessor a Named party on the insurance policy. Any lapse of insurance shall be considered a default under the terms of this Agreement.19. Indemnity of Lessor for Loss or Damages. Unless otherwise provided in this Lease, if the equipment is damaged or lost, Lessor shall have the option of requiring the Lessee to repair the equipment to a state of good working order, or replace equipment with like equipment in good repair, which equipment shall become the property of the Lessor and subject to this Lease.20. Liability and Indemnity. Liability for injury, disability, and death of workers and other persons caused by operating, handling, or transporting the equipment during the term of this Lease is the obligation of Lessee, and Lessee shall indemnify and hold Lessor harmless from and against all such liability. Lessee shall maintain liability insurance of at least $1 million as further discussed in Section 18 above, entitled “Risk of Loss or Damage and Insurance.21. Taxes and Fees. During the term of this Lease, the Lessee shall pay all applicable taxes, assessments, and license and registration fees on the equipment.22. Default. The occurrence of any of the following shall constitute a default under this Lease:A. Failure to make a required payment under this Lease when due.B. Violation of any other provision or requirement that is not corrected within 10 days after written notice of the violation is given.C. The insolvency or bankruptcy of Lessee.D. The subjection of any of Lessee's property to any levy, seizure, assignment, application or sale for or by any creditor or government agency.23. Rights upon Default. In addition to any other rights afforded the Lessor by law, if the Lessee is in default under this Lease, without notice to or demand on the Lessee, the Lessor may take possession of the equipment as provided by law, deduct the costs of recovery (including attorney fees and legal costs), repair, and related costs, and hold the Lessee responsible for any deficiency. The rights and remedies of the Lessor provided by law and this Agreement shall be cumulative in nature. Lessor shall be obligated to re-lease the equipment, or otherwise mitigate the damages from the default, only as required by law.Exhibit 1: Equipment ScheduleLease End Purchase Price: (Should be included; very important).Equipment LeaseReview ListThis review list is provided to inform you about the document in question and assist you in its preparation. This is a standard straightforward lease agreement. Be sure to file the appropriate local, county, and state liens (UCC forms) against the equipment within the locals where the Equipment is kept by Lessee, according to this Agreement. This not only perfects your interest in the property but also warns off other creditors of Lessee, so they do not attempt to attach the property. If they do, you will have a senior position.Be sure to establish an end of lease purchase price in Exhibit 1. Do likewise for a renewal period of the Equipment. GE Capital, for example, has found releasing Equipment very lucrative because the proper paperwork is in place and continuation is quite simple because, by the end of the first lease period, most equipment is worth more than its then supposed capital price. Therefore, you may be well advised from a business perspective to encourage releasing for a reduced price at the end of the lease. In this instance, inertia is on your side since Lessee “has” the Equipment and it is always easier to continue as is rather than getting new equipment, and so on.1. Make multiple copies so you have several sets for your various files, including your corporate records.2. Be sure to file liens, as appropriate, as described above against your equipment in the appropriate jurisdictions.
When a lessee sells leased equipment to a third party the lessor cannot under any circumstances recover the equipment from the buyer?
Wrong. If the lessee sells equipment to someone else that does not belong to him then it becomes stolen equipment. Then the buyer is in possession of stolen equipment. If the buyer knows or should know that the equipment is stolen, he is committing a felony. It is punishable by time in prison. The material is returned to the original owner.
Can a cosigner get out of a rental agreement?
Not unless the lessor agrees to release the co-signer from the obligation and that agreement should be in writing.Not unless the lessor agrees to release the co-signer from the obligation and that agreement should be in writing.Not unless the lessor agrees to release the co-signer from the obligation and that agreement should be in writing.Not unless the lessor agrees to release the co-signer from the obligation and that agreement should be in writing.
Can a tenant sign a lease takeover with the new tenant if they have a guarantor on the original lease and the guarantor hasn't signed the lease takeover?
No. The tenant cannot make changes to the lease agreement without the signature of their co-signer. The "lease takeover" you suggest would not be binding on the lessor and the lessee & co-signer would remain fully responsible under the original lease agreement. You should not even consider making any changes that would affect the co-signer of the lease without notifying the co-signer.No. The tenant cannot make changes to the lease agreement without the signature of their co-signer. The "lease takeover" you suggest would not be binding on the lessor and the lessee & co-signer would remain fully responsible under the original lease agreement. You should not even consider making any changes that would affect the co-signer of the lease without notifying the co-signer.No. The tenant cannot make changes to the lease agreement without the signature of their co-signer. The "lease takeover" you suggest would not be binding on the lessor and the lessee & co-signer would remain fully responsible under the original lease agreement. You should not even consider making any changes that would affect the co-signer of the lease without notifying the co-signer.No. The tenant cannot make changes to the lease agreement without the signature of their co-signer. The "lease takeover" you suggest would not be binding on the lessor and the lessee & co-signer would remain fully responsible under the original lease agreement. You should not even consider making any changes that would affect the co-signer of the lease without notifying the co-signer.
Should the lessor amortize the nonrefundable security deposite?
There is no such thing as a nonrefundable security deposit.
If a tenant breaks a commercial lease how long does the landlord have to sue them?
This is a really general question.... It first assumes that: There is in fact a breach of the lease, the proximate cause of the breach is the Lessee's fault, and that damage occurred to the Lessor as a result of it. The answer may well be affected by local laws, precedent, and the terms of the Lease itself. For such things as nonpayment of rent, for example, a Lease may give the Lessee thirty days to repay before the Lease is in material breach, and specify that Lessee is still responsible for payment for all charges accrued until Lessor gives notice of breach. But the generic answer is, "within a reasonable amount of time," and "reasonable" would be defined by the Court of jurisdiction. Five years after Lessee has walked out the door - probably too long. A year... questionable but supportable. Six months? You're probably OK. Also, are you talking a small claims action, where you'd represent yourself? Or are you talking about hiring a lawyer? Either way, though, this is a question that really should be answered by a competent lawyer in your jurisdiction. You should be able to find an attorney who'd give you an opinion at little (or more likely zero) charge.
What are off lease laptops?
A general and brief definition of a common lease.Items (automobiles, equipment tools, houses, land, etc) that is leased means the owner (leasor) keeps title (ownership) to the Item(s) and grants the lessee the right to reasonablyuse it for its stated or obvious intended use (usually defined in the lease agreement) for a definite period of time as set forth in a lease-agreement. If the item(s), while being so reasonably used, becomes defective or broken for some reason not by the negligence or fault of lessee, the lessor usually replaces the equipment with similar equipment for the remaining lease period. At the end of the lease period, the lessee returns the equipment; or, it can often be purchased by the lessee for a agreed sum.If one has questions concerning the lease-agreement, an attorney should be consulted, as there can be other factors not included in the above definition that may be important and change the way the a particular lease is intended.
Leasing Commercial Property?
Leasing commercial property is one of the most difficult and important steps in business operations. Whether for a going concern or a start-up business, entering into a lease without careful advance planning will likely result in an unsatisfactory lease relationship, and can even lead to serious conflict between lessee and lessor. Commercial property leasing is an ongoing business challenge, with most businesses leasing commercial property every several years. In many cases, though, leases are poorly prepared or poorly reviewed and fail to meet their intended purpose. The lease might be viewed as a partnership between lessee and lessor in that it defines the terms of a business relationship and sets out ongoing expectations. It does so, however, with the power of contract, and this is why lease development and negotiation are acutely important. The focus of lease negotiations is often reduced to solely issues of rent and improvements. However, there are many issues besides these that are equally critical. Would-be lessees are often not represented in negotiations by an attorney or even a real estate broker, and this is often a mistake. The unrepresented lessee is liable to simply accept any document presented by a lessor without review or modification. In this case, very often lessees find only later that the lease does not meet their needs. Of course, a lessee should know its needs even before a property is selected, and insure that the property chosen meets those needs. If so, then negotiations can proceed smoothly to conclusion.
What is ijarah?
"Ijarah" is a term of Islamic fiqh. Lexically, it means 'to give something on rent'. In the Islamic jurisprudence, the term 'Ijarah' is used for two different situations. In the first place, it means 'to employ services of a person on wages given to him as a consideration for his hired services'. The employer is called 'musta'jir' while the employee is called 'ajir'. Therefore, if A has employed B in his office as a manager or as a clerk on a monthly salary, A is a musta'jir, and B is an ajir. Similarly, if A has hired the services of a porter to carry his baggage to the airport, A is a musta'jir while the porter is an ajir, and in both cases the transactions between the parties is termed as Ijarah. This type of Ijarah includes every transaction where the services of a person are hired by someone else. He may be a doctor, a lawyer, a teacher, a labourer or any other person who can render some valuable services. Each one of them may be called an 'ajir' according to the terminology of Islamic Law, and the person who hires their services is called a 'musta'jir' while the waged paid to the 'ajir' are called their 'ujrah'. The second type of Ijarah related to the usufructs of assets and properties, and not the services of human beings. 'Ijarah' in this sense means 'to transfer the usufruct of a particular property to another person in exchange for a rent claimed from him.' In this case, the term 'Ijarah' is analogous to the English term 'leasing'. Here the lessor is called 'Mu'jir', the lessee is called 'musta'jir' and the rent payable to the lesser is called 'ujrah'. Both these kinds of Ijarah are thoroughly discussed in the literature of Islamic jurisprudence and each one of them has its set of rules. But for the purpose of the present book, the second type of Ijarah is more relevant, because it is generally used as a form of investment, and as a mode of financing also. The rules of Ijarah, in the sense of leasing, is very analogous to the rules of sale, because in both cases something is transferred to another person for a valuable consideration. The only difference between Ijarah and sale is that in the latter case the corpus of the property is transferred to the purchaser, while in the case of Ijarah, the corpus of the property remains in the ownership of the transferor, but only its usufruct i.e. the right to use it, is transferred to the lessee. Therefore, it can easily be seen that 'Ijarah' is not a mode of financing in its origin. It is a normal business activity like sale. However, due to certain reasons, and in particular, due to some tax concessions it may carry, this transaction is being used in the Western countries for the purpose of financing also. Instead of giving a simple interest - bearing loan, some financial institutions started leasing some equipments to their customers. While fixing the rent of these equipments they calculate the total cost they have incurred in the purchase of these assets and add the stipulated interest they could have claimed on such an amount during the lease period. The aggregate amount so calculated is divided on the total months of the lease period, and the monthly rent is fixed on that basis. The question whether or not the transaction of leasing can be used as a mode of financing in Shari'ah depends on the terms and conditions of the contract. As IJARAH By Maulana Taqi Usmani An online publication by accountancy.com.pk Page 3 of 14 mentioned earlier, leasing is a normal business transaction and not a mode of financing. Therefore, the lease transaction is always governed by the rules of Shari'ah prescribed for Ijarah. Let us, therefore, discuss the basic rules governing the lease transactions, as enumerated in the Islamic Fiqh. After the study of these rules, we will be able to understand under what conditions the Ijarah may be used for the purpose of financing. Although the principles of Ijarah are so numerous that a separate volume is required for their full discussion, we will attempt in this chapter to summarize those basic principles only which are necessary for the proper understanding of the nature of the transaction and are generally needed in the context of modern economic practice. These principles are recorded here in the form of brief notes, so that the readers may use them for quick reference. Basic Rules of Leasing: 1. Leasing is a contract whereby the owner of something transfers its usufruct to another person for an agreed period, at an agreed consideration. 2. The subject of lease must have a valuable use. Therefore, things having no usufruct at all cannot be leased. 3. It is necessary for a valid contract of lease that the corpus of the leased property remains in the ownership of the seller, and only its usufruct is transferred to the lessee. Thus, anything which cannot be used without consuming cannot be leased out. Therefore, the lease cannot be affect in respect of money, eatables, fuel and ammunition etc. because their use is not possible unless they are consumed. If anything of this nature is leased out, it will be deemed to be a loan and all the rules concerning the transaction of loan shall accordingly apply. Any rent charged on this invalid lease shall be interest charged on a loan. 4. As the corpus of the leased property remains in the ownership of the lessor, all the liabilities emerging from the ownership of the lessor, all the liabilities emerging from the ownership shall be borne by the lessor, but the liabilities referable to the use of property shall be borne by the lessee. Example: A has leased his house to B. The taxes referable to the property shall be borne by A, while the water tax, electricity bills and all expenses referable to the use of the house shall be borne by B, the lessee. 5. The period of lease must be determined in clear terms. 6. The lessee cannot use the leased asset for any purpose other than the purpose specified in the lease agreement. If no such purpose is specified in the agreement, the lessee can use it for whatever purpose it is used in the normal course. However, if he wishes to use it for an abnormal purpose, he cannot do unless the lessor allows him in express terms. 7. The lessee is liable to compensate the lessor for every harm to the leased asset caused by any misuse or negligence on the part of the lessee. IJARAH By Maulana Taqi Usmani An online publication by accountancy.com.pk Page 4 of 14 8. The leased asset shall be remained in the risk of the lessor throughout the lease period in the sense that any harm or loss caused by the factors beyond the control of the lessee shall be borne by the lessor. 9. A property jointly owned by two or more persons can be leased out, and the rental shall be distributed between all the joint owners according to the proportion of their respective shares in the property. 10. A joint owner of a property can lease his proportionate share to his co-sharer only, and not to any other person. 11. It is necessary for a valid lease that the leased asset is fully identified by the parties. Example: A said to B: "I lease you one of my two shops." The lease is void, unless the leased shop is clearly determined and identified. Determination of Rental: 12. The rental must be determined at the time of contract for the whole period of lease. It is permissible that different amounts of rent are fixed for different phases during the lease period, provided that the amount of rent for each phase is specifically agreed upon at the time of affecting a lease. If the rent for a subsequent phase of the lease period has not been determined or has been left at the option of the lessor, the lease is not valid. Example (1): A leases his house to B for a total of 5 years. The rent for the first year is fixed as Rs. 2000/- per month and it is agreed that the rent of every subsequent year shall be 10% more than the previous one. The lease is valid. Example (2): In the above example, A puts a condition in the agreement that the rent of Rs. 2000/- per month is fixed for the first year only. The rent for the subsequent years shall be fixed each year at the option of the lessor. The lease is void, because the rent is uncertain. 13. The determination of rental on the basis of the aggregate cost incurred in the purchase of the asset by the lessor, as normally done in financial leases, is not against the rules of the Shari'ah, if both parties agree to it, provided that all other conditions of a valid lease prescribed by the Shari'ah are fully adhered to. 14. The lessor cannot increase the rent unilaterally, and any agreement to this effect is void. 15. The rent or any other part thereof may be payable in advance before the delivery of the asset to the lessee, but the amount so collected by the lessor shall remain with him as 'on account' payment and shall be adjusted towards the rent after its being due. 16. The lease period shall commence from the date on which the leased asset has been delivered to the lessee, no matter whether the lessee has started using it or not. IJARAH By Maulana Taqi Usmani An online publication by accountancy.com.pk Page 5 of 14 17. If the leased asset has totally lost the function for which it was leased, and no repair is possible, the lease shall terminate on the day in which such loss has been caused. However, if the loss is caused by the misuse or by the negligence of the lessee, he will be liable to compensate the lessor for the depreciated value of the asset as, it was immediately before the loss. Lease as a Mode of Financing: Like Murabaha, lease is not originally a mode of financing. It is simply a transaction meant to transfer the usufruct of a property from one person to another for an agreed period against an agreed consideration. However, certain financial institutions have adopted leasing as a mode of financing instead of long term lending on the basis of interest. This kind of lease is generally known as the 'financial lease' as distinguished from the 'operating lease' and many basic features of actual leasing transaction have been dispensed with therein. When interest-free financial institutions were established in the near past, they found that leasing is a recognized mode of finance throughout the world. On the other hand, they realized that leasing is a lawful transaction according to Shari'ah and it can be used as an interest-free mode of financing. Therefore, leasing has been adopted by the Islamic financial institutions, but very few of them paid attention to the 'financial lease' has a number of characteristics more similar to interest than to the actual lease transaction. That is why they started using the same model agreements of leasing as were in vogue among the conventional financial institutions without any modification, while a number of their provisions were not in conformity with Shari'ah. As mentioned earlier, leasing is not a mode of financing in its origin. However, the transaction may be used for financing, subject to certain conditions. It is not sufficient for this purpose to substitute the name of 'interest' by the name of 'rent' and replace the name 'mortgage' by the name of 'leased asset'. There must be a substantial difference between leasing and an interest-bearing loan. That will be possible only by following all the Islamic rules of leasing, some of which have been mentioned in the first part of this chapter. To be more specific, some basic differences between the contemporary financial leasing and the actual leasing allowed by the Shari'ah are indicated below. The Commencement of Lease: 1. Unlike the contract of sale, the agreement of Ijarah can be affected for a future date. Thus, while a forward sale is not allowed in Shari'ah, an 'Ijarah' for a future date is allowed, on the condition that the rent will be payable only after the leased asset is delivered to the lessee. In most cases of the 'financial lease' the lessor i.e. the financial institution purchases the asset through the lessee himself. The lessee purchases the asset on behalf of the lessor who pays its price to the supplier, either directly or through the lessee. In some lease agreements, the lease commences on the very day on which the price is paid by the lessor, irrespective of whether the lessee has affected payment to the supplier and taken delivery of the asset or not. It may mean that lessee's liability for the rent starts before the lessee takes delivery of the asset. This is not allowed in Shari'ah, because it IJARAH By Maulana Taqi Usmani An online publication by accountancy.com.pk Page 6 of 14 amounts to charging rent on the money given to the customer which is nothing but interest, pure and simple. The correct way according to Shari'ah, is that the rent be charged after the lessee has taken delivery of the asset, and not from the day the price has been paid. If the supplier has delayed the delivery after receiving the full price, the lessee should not be liable for the rent of the period of delay. Different Relations of the Parties: 2. It should be clearly understood that when the lessee himself has been entrusted with the purchase of the asset intended to be leased, there are two separate relations between the institution and the client which come into operation one after the other. In the first instance, the client is an agent of the institution to purchase the asset on latter's behalf. At this stage, the relation between the parties is nothing more than the relation of a principal and his agent. The relation of lessor and lessee has not yet come into operation. The second stage begins from the date when the client takes delivery from the supplier. At this stage, the relation of lessor and lessee comes to play its role. These two capacities of the parties should not be mixed up or confused with each other. During the first stage, the client cannot be held liable for the obligations of a lessee. In this period, he is responsible to carry out the functions of an agent only. But when the asset is delivered to him, he is liable to discharge his obligations as a lessee. However, there is a point of difference between murabahah and leasing. In murabahah, as mentioned earlier, actual sale should take place after the client takes delivery from the supplier, and the previous agreement of murabahah is not enough for affecting the actual sale. Therefore, after taking possession of the asset as an agent, he is bound to give intimation to the institution and make an offer for the purchase from him. The sale takes place after the institution accepts the offer. The procedure in leasing is different, and a little shorter. Here, the parties need not affect the lease contract after taking delivery. If the institution, while appointing the client its agent, has agreed to lease the asset with effect from the date of delivery, the lease will automatically start on the date without any additional procedure. There are two reasons for this difference between murabahah and leasing: Firstly, it is a necessary condition for a valid sale that it should be affected instantly. Thus, a sale attributed to a future date is invalid in Shari'ah. But leasing can be attributed to a future date. Therefore, the previous agreement is not sufficient in the case of murabahah, while it is quite enough in the case of leasing. Secondly, the basic principle of Shari'ah is that one cannot claim a profit or a fee for a property the risk which was never borne by him. Applying this principle to murabaha, the seller cannot claim a profit over a property which never remained under his risk for a moment. Therefore, if the previous agreement is held to be sufficient for affecting a sale between the client and the institution, the asset shall be transferred to the client simultaneously when he takes its IJARAH By Maulana Taqi Usmani An online publication by accountancy.com.pk Page 7 of 14 possession, and the asset shall not come into the risk of the seller even for a moment. That is why the simultaneous transfer is not possible in murabahah, and there should be a fresh offer and acceptance after the delivery. In leasing, however, the asset remains under the risk and ownership of the lessor throughout the leasing period, because the ownership has not been transferred. Therefore, if the lease period begins right from the time when the client has taken delivery, it does not violate the principle mentioned above. Expenses Consequent to Ownership: 3. As the lessor is the owner of the asset, and he has purchased it from the supplier through his agent, he is liable to pay all the expenses incurred in the process of its purchase and its import to the country of the lessor. Consequently, he is liable to pay the freight and the customs duty etc. He can, of course, include all these expenses in his cost and can take them into consideration while fixing the rentals, but as a matter of principle, he is liable to bear all these expenses as the owner of the asset. Any agreement to the contrary, as is found in the traditional financial leases, is not in conformity with Shari'ah. Liability of the Parties in case of Loss of Asset: 4. As mentioned in the basic principles of leasing, the lessee is responsible for any loss caused to the asset by his misuse or negligence. He can also be made liable to the wear and tear which normally occurs during its use. But he cannot be made liable to a loss caused by the factors beyond his control. The agreements of the traditional 'financial lease' generally do not differentiate between the two institutions. In a lease based on the Islamic principles, both the situations should be dealt with separately. Variable Rentals in Long Term Leases: 5. In the long term lease agreements it is mostly not in the benefit of the lessor to fix one amount for rent for the whole period of lease, because the market conditions change from time to time. In this case the lessor has two options: a) He can contract lease with a condition that the rent shall be increased accordingly to a specified proportion (e.g. 5%) after a specified period (like one year). b) He can contract lease for a shorter period after which the parties can renew the lease at new terms and by mutual consent, with full liberty to each one of them to refuse the renewal, in which case the lessee is bound to vacate the leased property and return it back to the lessor. These two options are available to the lessor according to the classical rules of Islamic Fiqh. However, some contemporary scholars have allowed, in long term leases, to tie up the rental amount with a variable benchmark which is so well-known and welldefined that it does not leave room for any dispute. For example, it is permissible according to provide in the lease contract that in case of any increase in the taxes imposed by the government on the lessor, the rent will be increased to the extent of the same amount. Similarly it is allowed by them that the annual increase in the rent is IJARAH By Maulana Taqi Usmani An online publication by accountancy.com.pk Page 8 of 14 tied up with the rate of inflation. Therefore if there is an increase of 5% in the rate of inflation, it will result in an increase of 5% in the rent as well. Based on the same principle, some Islamic banks use the rate of interest as a benchmark to determine the rental amounts. They want to earn the same profit through leasing as is earned by conventional banks through advancing loans on the basis of interest. Therefore, they want to tie up the rentals with the rate of interest and instead of fixing a definite amount of rental, they calculate the cost of purchasing the lease assets and want to earn through rentals an amount equal to the rate of interest. Therefore, the agreement provides that the rental will be equal to the rate of interest or to the rate of interest plus something. Since the rate of interest is variable, it cannot be determined for the whole lease period. Therefore, these contracts use the interest rate of a particular country (like LIBOR) as a benchmark for determining the periodical increase in the rent. This arrangement has been criticized on two grounds: The first objection raised against it is that, by subjecting the rental payments to the rate of interest, the transaction is rendered akin to an interest based financing. This objection can be overcome by saying that, as fully discussed in the case of murabahah, the rate of interest is used as a benchmark only. So far as other requirements of Shari'ah for a valid lease are properly fulfilled, the contract may use any benchmark for determining the amount of rental. The basic difference between an interest - based financing and a valid lease does not lie in the amount to be paid to the financier or the lessor. The basic difference is that in the case of the lease, the lessor assumes the full risk of the corpus of the leased asset. If the asset is destroyed during the lease period, the lessor will suffer the loss. Similarly, if the leased asset looses its usufruct without any misuse or negligence on the lessee, the lessor cannot claim the rent, while in the case of an interest-based financing, the financier is entitled to receive interest, even if the debtor did not at all benefit from the money borrowed. So far as this basic difference is maintained, (i.e. the lessor assumes the risk of the leased asset) the transaction cannot be categorized as an interest-bearing transaction, even though the amount of rent claimed from the lessee is equal to the rate of interest. It is thus clear that the use of the rate of interest merely as a benchmark does not render the contract invalid as an interest-based transaction. It is, however, advisable at all times to avoid using interest even as a benchmark, so that an Islamic transaction is totally distinguished from an un-Islamic one, having no resemblance of interest whatsoever. The second objection to this arrangement is that the variations of the rate of interest being unknown, the rental tied up with the rate of interest will imply Jahalah and Gharar which is not permissible in Shari'ah. It is one of the basic requirements of Shari'ah that the consideration in every contract must be known to the parties when they enter into it. The consideration in a transaction of lease is the rent charged from the lessee, and therefore it must be known to each party right at the beginning of the contract of lease. If we tie up the rental with the future rate of interest, which is unknown, the amount of rent will remain unknown as well. This is the Jahalah or Gharar which renders the transaction invalid. IJARAH By Maulana Taqi Usmani An online publication by accountancy.com.pk Page 9 of 14 Responding to this objection, one may say that the Jahalah has been prohibited for two reasons: One reason is that it may lead to dispute between parties. This reason is not applicable here, because both parties have agreed with mutual consent upon a well defined benchmark that will serve as a criterion for determining the rent, and whatever amount is determined, based on this benchmark, will be acceptable to both parties. Therefore, there is no question of any dispute between them. The second reason for the prohibition of jahalah is that it renders the parties susceptible to an unforeseen loss. It is possible that the rate of interest, in a particular period, zooms up to an unexpected level in which case the lessee will suffer. It is equally possible that the rate of interest zooms down to an unexpected level, in which case the lessor may suffer. In order to meet the risks involved in such possibilities, it is suggested by some contemporary scholars that the relation between rent and the rate of interest is subjected to a limit or ceiling. For example, it may be provided in the base contract that the rental amount after a given period, will be changed according to the change in the rate of interest, but it will in no case be higher than 15% or lower than 5% of the previous monthly rent. It will mean that if the increase in the rate of interest is more than 15% the rent will be increased only upto 15%. Conversely, if the decrease in the rate of interest is more than 5% the rent will not be decreased to more than 5%. In our opinion, this is a moderate view which takes care of all the aspects involved in the issue. Penalty for Late Payment of Rent: 6. In some agreements of financial leases, a penalty is imposed on the lessee in case he delays the payment of rent after the due date. This penalty, if meant to add to the income of the lessor, is not warranted by the Shari'ah. The reason is that the rent after it becomes due, is a debt payable by the lessee, and is subject to all the rules prescribed for a debt. A monetary charge from a debtor for his late payment is exactly the riba prohibited by the Holy Qur'an. Therefore, the lessor cannot charge an additional amount in case the lessee delays payment of the rent. However, in order to avoid the adverse consequences resulting from the misuse of this prohibition, another alternative may be resorted to. The lessee may be asked to undertake that, if he fails to pay rent on its due date, he will pay a certain amount to a charity. For this purpose the financier / lessor may maintain a charity fund where such amounts may be credited and disbursed for charitable purposes, including advancing interest-free loans to the needy persons. The amount payable for charitable purposes by the lessee may vary according to the period of default and may be calculated at per cent, per annum basis. The agreement of the lease may contain the following clause for this purpose: "The Lessee hereby undertakes that, if he fails to pay rent at its due date, he shall pay an amount calculated at …% p.a. to the charity Fund maintained by the Lessor which will be used by the Lessor exclusively for charitable purposes approved by the Shari'ah and shall in no case form part of the income of the Lessor." IJARAH By Maulana Taqi Usmani An online publication by accountancy.com.pk Page 10 of 14 This arrangement though does not compensate the lessor for his opportunity cost of the period of default, yet it may serve as a strong deterrent for the lessee to pay the rent promptly. The justification for such undertaking of the lessee, and inability of any penalty or compensation claimed by the lessor for his own benefit is discussed in full in the chapter 'Murabahah' in the present book which may be consulted for details. Termination of Lease: 7. If the lessee contravenes any term of the agreement, the lessor has a right to terminate the lease contract unilaterally. However, if there is no contravention on the part of the lessee, the lessee cannot be terminated without mutual consent. In some agreements of the 'financial lease' it has been noticed that the lessor has been given an unrestricted power to terminate the lease unilaterally whenever he wishes, according to his sole judgment. This is again contrary to the principles of Shari'ah. In some agreements of the 'financial lease' a condition has been found to the effect that in case of the termination of the lease, even at the option of the lessor, the rent of the remaining lease period shall be paid by the lessee. This condition is obviously against sharia'ah and the principles of equity and justice. The basic reason for inserting such conditions in the agreement of lease is that the main concept behind the agreement is to give an interest-bearing loan under the ostensible cover of lease. That is why every effort is made to avoid the logical consequences of the lease contract. Naturally, such a condition cannot be acceptable to Shari'ah. The logical consequence of the termination of lease is that the asset should be taken back by the lessor. The lessee should be asked to pay the rent as due upto the date of termination. If the termination has been effected due to the misuse or negligence on the part of the lessee, he can also be asked to compensate the lessor for the loss caused by such misuse or negligence. But he cannot be compelled to pay the rent of the remaining period. Insurance of the Assets: 8. If the leased property is insured under the Islamic mode of takaful, it should be at the expense of the lessor and not at the expense of the lessee, as is generally provided in the agreements of the current 'financial leases'. The Residual Value of the Leased Asset: 9. Another important feature of the modern 'financial leases' is that after the expiry of the lease period, the corpus of the leased asset is normally transferred to the lessee. As the lessor already recovers his cost alongwith an additional profit thereon, which is normally equal to the amount of interest which could have been earned on a loan of that amount advanced for that period, the lessor has no further interest in the leased asset. On the other hand, the lessee wants to retain the asset after the expiry of the leased period. For these reasons, the leased asset is generally transferred to the lessee at the end of the lease, either free of any charge or at a nominal token price. In order to ensure that IJARAH By Maulana Taqi Usmani An online publication by accountancy.com.pk Page 11 of 14 the asset will be transferred to the lessee, sometimes the lease contract has an express clause to this effect. Sometimes this condition is not mentioned in the contract expressly; however, it is understood between the parties that the title of the asset will be passed on to the lessee at the end of the lease term. This condition, whether it is express or implied, is not in accordance with the principles of Shari'ah. It is a well settled rule of Islamic jurisprudence that one transaction cannot be tied up with another transaction so as to make the former a precondition for the other. Here the transfer of the asset at the end has been made a necessary condition for the transaction of lease which is not allowed in Shari'ah. The original position in Shari'ah is that the asset shall be the sole property of the lessor, and after the expiry of the lease period, the lessor shall be at liberty to take the asset back, or to renew the lease or to lease it out to another party, or sell it to the lessee or to any other person. The lessee cannot force him to sell it to him at a nominal price, nor can such condition be imposed on the lessor in the lease agreement. But after the lease period expires, and the lessor wants to give the asset to the lessee as a gift or sell it to him, he can do so by his free will. However, some contemporary scholars, keeping in view the needs of the Islamic financial institutions have come up with an alternative. They say that the agreement of Ijarah itself should not contain a condition of gift or sale at the end of the lease period. However, the lessor may enter into a unilateral promise to sell the leased asset to the lessee at the end of the lease period. This promise will be binding on the lessor only. The principle, according to them, is that a unilateral promise to enter into a contract at a future date is allowed whereby the promisor is bound to fulfil the promise, but the promisee is not bound to enter into that contract. It means that he has an option to purchase which he may or may not exercise. However, if he wants to exercise his option to purchase, the promisor cannot refuse it because he is bound by his promise. Therefore, these scholars suggest that the lessor, after entering into the lease agreement, can sign a separate unilateral promise whereby he undertakes that if the lessee has paid all the amounts of rentals and wants to purchase the asset at a specified mutually acceptable price, he will sell the leased asset to him for that price. Once this promise is signed by the lessor, he is bound to fulfil it and the lessee may exercise his option to purchase at the end of the period, if he has fully paid the amounts of rent according to the agreement of lease. Similarly, it is also allowed by these scholars that, instead of sale, the lessor signs a separate promise to gift the leased asset to the lessee at the end of the lease period, subject to his payment of all amounts of rent. This arrangement is called 'Ijarah WA iqtina'. It has been allowed by a large number of contemporary scholars and is widely acted upon by the Islamic banks and financial institutions. The validity of this arrangement is subject on two basic conditions: Firstly, the agreement of Ijarah itself should not be subjected to signing this promise of sale or gift but the promise should be recorded in a separate document. IJARAH By Maulana Taqi Usmani An online publication by accountancy.com.pk Page 12 of 14 Secondly, the promise should be unilateral and binding on the promisor only. It should not be a bilateral promise binding on both parties because in this case it will be a full contract effected to a future date which is not allowed in the case of sale or gift. Sub-Lease: 10. If the leased asset is used differently by different users, the lessee cannot sub-lease the leased asset except with the express permission of the lessor. If the lessor permits the lessee for subleasing, he may sublease it. If the rent claimed from the sub-lessee is equal to or less than the rent payable to the owner / original lessor, all the recognized schools of Islamic jurisprudence are unanimous on the permissibility of the sublease. However, the opinions are different in case the rent charged from the sublessee is higher than the rent payable to the owner. Imam al-Shafi'i and some other scholars allow it and hold that the sub lessor may enjoy the surplus received from the sublessee. This is the preferred view in the Hanbali school as well. On the other hand, Imam abu Hanifah is of the view that the surplus received from the sub lessee in this case is not permissible for the sub -lessor to keep and he will have to give that surplus to charity. However, if the sub-lessor has developed the leased property by adding something to it or has rented it in a currency different from the currency in which he himself pays rent to the owner / the original lessor, he can claim a higher rent from his sub-lessee and can enjoy the surplus. Although the view of Imam Abu Hanifah is more precautious which should be acted upon to the best possible extent, in cases of need the view of Shafi' and Hanbali schools may be followed because there is no express prohibition in the Holy Qur'an or in the Sunnah against the surplus claimed from the lessee. Ibn Qudamah has argued for the permissibility of surplus on forceful grounds. Assigning of the Lease: 11. The lessor can sell the leased property to a third party whereby the relation of lessor and lessee shall be established between the new owner and the lessee. However, the assigning of the lease itself (without assigning the ownership in the leased asset) for a monetary consideration is not permissible. The difference between the two situations is that in the latter case the ownership of the asset is not transferred to the assignee, but he becomes entitled to receive the rent of the asset only. This kind of assignment is allowed in Shari'ah only where no monetary consideration is charged from the assignee for this assignment. For example, a lessor can assign his right to claim rent from the lessee to his son, or to his friend in the form of a gift. Similarly, he can assign this right to any one of his creditors to set off his debt out of the rentals received by him. But if the lessor wants to sell this right for a fixed price, it is not permissible, because in this case the money (amount of rentals) is sold for money which is a transaction subject to the principle of equality. Otherwise it will be tantamount to a riba transaction, hence prohibited. Securitization of Ijarah: The arrangement of Ijarah has a good potential of securitization which may help create a secondary market for the financiers on the basis of Ijarah. Since the lessor in Ijarah owns the leased assets, he can sell the asset, in whole or in part, to a third party IJARAH By Maulana Taqi Usmani An online publication by accountancy.com.pk Page 13 of 14 who may purchase it and may replace the seller in the rights and obligations of the lessor with regard to the purchased part of the asset. Therefore, if the lessor, after entering into Ijarah, wished to recover his cost of purchase of the asset with a profit thereon, he can sell the leased asset wholly or partially either to one party or to a number of individuals. In the latter case, the purchase of a proportion of the asset by each individual may be evidenced by a certificate which may be called 'Ijarah certificate'. This certificate will represent the holder's proportionate ownership in the leased asset and he will assume the rights and obligations of the owner / lessor to that extent. Since the asset is already leased to the lessee, the lease will continue with the new owners, each one of the holders of this certificate will have the right to enjoy a part of the rent according to his proportion of ownership in the asset. Similarly, he will also assume the obligations of the lessor to the extent of his ownership. Therefore, in the case of total destruction of the asset, he will suffer the loss to the extent of his ownership. These certificates, being an evidence of proportionate ownership in a tangible asset, can be negotiated and traded in freely in the market and can serve as an instrument easily convertible into cash. Thus they may help in solving the problems of liquidity management faced by the Islamic banks and financial institutions. It should be remembered, however, that the certificate must represent ownership of an undivided part of the asset with all its rights and obligations. Misunderstanding this basic concept, some quarters tried to issue Ijarah certificates representing the holder's right to claim certain amount of the rental only without assigning to him any kind of ownership in the asset. It means that the holder of such certificate has no relation to the leased asset at all. His only right is to share the rentals received from the lessee. This type of securitization is not allowed in Shari'ah. As explained earlier in this chapter, the rent after being due is a debt payable by the lessee. The debt or any security representing debt only is not a negotiable instrument in Shari'ah, because trading in such an instrument amounts to trade in money or in monetary obligation which is not allowed, except on the basis of equality, and if the equality of value is observed while trading in such instruments, the very purpose of securitization is defeated. Therefore, this type of Ijarah certificates cannot serve the purpose of creating a secondary market. It is, therefore, necessary that the Ijarah certificates are designed to represent real ownership of the leased assets, and not only a right to receive rent. Head-Lease: Another concept developed in the modern leasing business is that of 'head leasing'. In this arrangement a lessee sub-leases the property to a number of sub-leases. Then, he invites others to participate in his business by making them share the rentals received by his sub-lessees. For making them participate in receiving rentals, he charges a specified amount from them. This arrangement is not in accordance with the principles of Shari'ah. The reason is obvious. The lessee does not own the property. He is entitled to benefit from its usufruct only. That usufruct he has passed on to his sublessees by contracting a sub-lease with them. Now he does not own anything, neither the corpus of the property, nor its usufruct. What he has is the right to receive rent only. Therefore, he assigns a part of this right to other persons. It is already explained in detail that this right cannot be traded in, because it amounts to selling a IJARAH By Maulana Taqi Usmani An online publication by accountancy.com.pk Page 14 of 14 receivable debt at a discount which is one of the forms of riba prohibited by the Holy Qur'an and Sunnah. Therefore this concept is not acceptable. These are some basic features of the 'financial lease' which are not in conformity with the dictates of Shariah. While using the lease as an Islamic mode of finance, these shortcomings must be avoided. The list of the possible shortcomings in the lease agreement is not restricted to what has been mentioned above, but only the basic errors found in different agreements have been pointed out, and the basic principles of Islamic leasing have been summarized. An Islamic lease agreement must conform to all of them.
What may be unilaterally terminated by a lessor or lesser?
A lease agreement can often be unilaterally terminated by a lessor (the property owner) in cases of tenant default, such as non-payment of rent or violation of lease terms. Additionally, if the property is sold or if the lessor needs to reclaim the property for personal use, they may have the right to terminate the lease. However, the specific conditions for termination should be detailed in the lease agreement and may vary by jurisdiction.
Should cell tower income be part of an operating budget?
Generally speaking, no. Despite the lease requiring a long term committment by the lessor (landlord), they typically have termination language in them that allows the lessee cancel them at any time for any or no reason. Given that there is a finite number of carriers out there (Verizon Wireless, AT&T, Tmobile and Sprint/Nextel being the only nationwide carriers these days), once the lessee decides to terminate, chances of replacing that revenue stream are slim. It's different than, say, an office tenant. Once one of those tenants leave, there's more of an infinite number of potential renters. Cell tower income should be considered just a little something extra that's better to have than not, but should not be part of an operating budget or considered when calculating cap rate.
