An operating lease is a type of lease agreement in which a lessee gains access to and uses an asset from a lessor for a specified period of time.
An operating lease is akin to a rental arrangement. It allows the lessee to use the asset without taking on the risks and responsibilities of ownership.
Key characteristics:
Operating leases typically require lower upfront payments or even no down payment, making it a more accessible option for businesses with limited capital. Furthermore, they offer flexibility as they allow businesses to use the latest and best equipment without committing to ownership.
Suppose Company A wants to expand its operations and needs additional space to accommodate its growing inventory. Instead of purchasing a new building, Company A decides to enter into an operating lease agreement with a property owner for a warehouse space.
The lease agreement requires that Company A will lease the warehouse for a period of three years at a monthly rent of R5,000.
Throughout the lease period, Company A will use the warehouse to store its inventory and conduct its business operations. At the end of the lease term, Company A can choose to renew the lease, negotiate new lease terms, or leave the premises, depending on its business needs.