A locked lease, also known as a walkaway or net lease, allows the tenant to assess the property’s value at the end of the lease and decide whether to purchase it or not. The lease calculates the anticipated value of the property at the end of the lease, and if the property has depreciated, the tenant can end the relationship and find new housing. If the property has appreciated, the lessee may choose to exercise the provisions of the lease that allow the purchase of the property to be completed. The model is valid for other types of property, including real estate, and is subject to local regulations.
Also known as a walkaway lease or net lease, a locked lease is a type of rental agreement that does not commit the tenant to purchase the property at the time the contract expires. This type of agreement makes it possible for the lessee to assess the current value of the property at the time the lease expires and determine whether the property has appreciated or depreciated over the course of the lease. If the value of the property has depreciated, the tenant can simply end the relationship and find new housing. In situations where the property has appreciated, the lessee may choose to exercise the provisions of the lease that allow the purchase of the property to be completed.
While there are variations in the way a closed lease is written, a basic model requires calculating the anticipated value of the property at the end of the lease. For example, if the subject property is a vehicle, the projected value assessment at the end of the lease may be half of the original purchase price. This appraisal figure is used to calculate the amount of the monthly payments so that at the end of the lease, the lessee can pay the owner the projected value and thus be the direct owner of the vehicle.
This is where the closed lease offers an important option for the lessee. If the vehicle has depreciated beyond expectations, the lessee may choose not to exercise their option to purchase it at the end of the lease. Instead, the owner retains full title. If the lessee chooses to purchase the vehicle despite the additional depreciation, the lessee will pay the owner the projected value 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 find another mode of transportation.
There are cases where the same model is valid for other types of property, including real estate. Here, the lessee can use a closed lease situation to secure property that appreciates beyond its anticipated value at the time the lease becomes effective. Depending on how the lease provisions are worded, the lessee may have the option to purchase the property at the amount projected at the beginning of the lease. This means that if the property appreciated approximately twenty percent more than previously projected, the lessee can exercise the option and purchase the property with the lower projection, instead of current market value.
Since the gated lease 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 projected value if the property has appreciated beyond prior expectations. As with any type of legal contract, it is important to understand how each provision of the contract would apply in different scenarios, before you commit.
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