Lease agreement

What it means

A lease agreement is a contract by which the landlord lets the tenant use a thing temporarily in return for rent. It may cover a flat, an office, a warehouse, land, a car or a machine. Unlike a purchase agreement, ownership does not pass; the tenant merely uses the thing.

The general rules are in the Civil Code, with special rules for leasing flats, commercial premises and commercial leases of movables. The agreement should set out the subject, the amount and due date of the rent, the lease term, payment for services, grounds for termination and who pays for repairs.

For a company, leasing is a common way of obtaining premises without investing in property. It differs from an operating lease mainly in that the latter usually includes servicing and insurance and is typical for cars and equipment.

How it works in practice

For the tenant, rent is an ordinary expense of the period it covers. If it is paid in advance for a longer period, we book it through prepaid expenses. The deposit the tenant pays at the start is not an expense but a receivable from the landlord.

For a landlord who is an individual, this is rental income with its own tax rules. Under the VAT act, letting property is generally exempt, but a landlord who is a VAT payer may opt to tax a lease to another VAT payer and deduct input VAT.

When a company is set up, the lease or the owner’s consent serves as proof of the right to use premises as the registered office. If the client uses a virtual office, we check that the contract with the provider includes mail handling and runs for long enough.

What to watch out for

When leasing premises it pays to agree in writing on improvements. If the tenant invests in someone else’s property, it needs the landlord’s consent and an agreement on who depreciates the investment and what happens when the lease ends, otherwise a dispute and tax complications with depreciation may follow.

Rent between related parties, for example when a shareholder lets their property to their own company, must be at market level under the transfer pricing rules. The tax office may refuse to accept excessive rent as a deductible expense in an audit.