An open-ended lease, also known as a walkaway or net lease, allows the lessee to evaluate the property’s value at the end of the lease and choose whether to purchase it or terminate the relationship. The expected value of the property is used to calculate monthly payments, and if the property depreciates beyond expectations, the lessee can choose not to buy it. In some cases, a closed lease may allow the lessee to purchase the property at the lower expected value, but local regulations may apply.
Also known as a walkaway lease or net lease, an open-ended lease is a type of lease that does not commit the lessee to purchase the property when the lease expires. This type of contract allows the lessee to evaluate the current value of the property at the time the contract expires and to determine whether the property has appreciated or depreciated during the term of the contract. If the value of the property has depreciated, the tenant can simply terminate the relationship and find new living arrangements. In situations where the property has appreciated, the lessee may choose to exercise provisions within the lease agreement that allow the purchase of the property to be completed.
While there are variations in how an open-ended lease is written, a basic model requires calculating the expected value of the property at the end of the lease. For example, if the property in question is a vehicle, the estimated expected value at the end of the lease may be half the original purchase price. This estimate figure is used to calculate the amount of monthly payments so that at the end of the lease, the lessee can pay the owner the expected value and thus own the vehicle outright.
This is where the permanent lease provides an important option for the lessee. If the vehicle has depreciated beyond expectations, the lessee may choose not to exercise their option to buy at the end of the lease. Instead, the owner retains full title. If the lessee chooses to buy the vehicle despite the further depreciation, he will pay the owner the value that was designed and used to structure the lease, effectively paying more for the vehicle than it is actually worth. For the most part, the lessee is much more likely to simply return the vehicle to the owner and look for another means of transportation.
There are instances where the same pattern holds true for other types of property, including real estate. In this case, the lessee can actually use a closed lease situation to secure the property that appreciates beyond its anticipated value at the time the lease is put into effect. Depending on how the provisions of the lease are worded, the lessee may have the option of purchasing the property for the amount stipulated at the beginning of the lease. This means that if the property has appreciated approximately twenty percent more than previously expected, the lessee can exercise the option and buy the property at the lower projection, rather than the current market value.
Because the closed-end leasing model is subject to local regulations, it is important to know which terms and provisions are governed by local law. In some areas, the lessee may not have the option to purchase at the lower expected value if the property has appreciated beyond previous expectations. As with any type of legal contract, it’s important to understand how each provision of the contract would apply in different scenarios, before making a commitment.
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