A lease extension is an agreement between a landlord and tenant to extend a rental agreement beyond its original expiration date, which can be established for both operating and capital leases. Negotiations for extension terms are subject to both parties’ agreement.
A lease extension is a contractual agreement between a tenant and a landlord that results in a rental agreement that is extended beyond its original expiration date. Operating leases are rental agreements in which a property is rented for a specified portion of its useful life, while capital leases are rental agreements that generally result in the lessee taking possession of the leased property. In many cases, a lease extension can be established between the parties involved in an operating or capital agreement.
Standard operating leases expire after a predetermined number of weeks, months, or years. At this time, the lessee returns the property to the lessor. Some operating agreements include provisions that allow the landlord to assess penalties if the tenant has subjected the rental property to unusual levels of wear and tear. To avoid paying these fees, a lessee may try to negotiate a lease extension. Thereafter, the lessee can use the property sparingly, so that when the extension expires, the condition of the property is in line with its age, with the result that the lessor cannot assess penalty charges based on of wear.
Capital leases are typically defined as agreements that last for more than 75% of the useful life of the leased property. Typically, the lessee has the option to purchase the rental property for a nominal amount at the end of the lease term. In other cases, the lessee may have the option to purchase the property for a pre-set price at any time during the lease term. A lessee may be highly dependent on the rental property during the lease term, but may lack the cash to purchase the property at the pre-arranged price. By agreeing to a lease extension, the tenant can continue to use the property without having to make a one-time lump sum payment to take possession of the property.
Like leases, lease extensions are subject to negotiation. Some leases include a provision for an extension, in which case the rent payments for the extended period may be itemized in the original lease. In many cases, the rental agreement includes an option for extension, but the landlord and tenant must agree to the terms of the extension when the initial lease term ends. If an agreement cannot be reached, the property must be returned to the owner.
A lease extension can be in the interest of both the lessor and the lessee because many types of property, including vehicles and machinery, depreciate over time. In many cases, a lessor may have difficulty renting an old piece of machinery or an old car to a new lessee because newer vehicles and machinery parts are readily available. Conversely, the current lessee may be more willing than another party to rent the old equipment because of the cost of replacing it or returning it to the lessee.
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