Question

Leases, especially those with variable rent based on revenue, and management agreements: ‘same same!’ Discuss.

Answer 1

Leases refer to agreement wherein one party (lessor) agrees to give out on rent (called lease rent) to other party (leassee).  

Payment terms of lease agreement vary depending upon the lease agreement terms. Two stipulated lease agreement types are basically different in nature.

Amount payable for the same asset under lease under these two lease agreement types will be different. Now, we discuss both the lease agreement types briefly.

1) Variable rent based on revenue: These types of lease agreements stipulate that lessee will pay to the lessor, an amount based on a percentage of sales value or other value. Basically, this results in variable payment being received by lessor and variable rent pay by lessee.

2) Fixed rent based on management agreement: This type of agreement stipulate that lessee pays a certain fixed amount of rent per month or per year irrespective of its turnover.

Now,

Variable rent based on revenue agreement types are more suitable for lessee who has newly entered into its businsess. This agreement type will not act as a cost burden on the orgazisation and will lead to flexibility in payment. As the organization will have to pay based on its variable sales.

On the other hand, any organization which is running business from long time and takes some asset on lease will prefer to pay fixed lease rent, because such an organization must have been settled in the business and must be earning more profits or achieving more revenue as compared to new ones. Hence, this type of organization would not like to let go its certain percentage of revenue.