Can a Lease be Terminated Early?

A typical net finance lease may not be canceled by the lessee during its initial term for any reason. This guarantees the lessor, subject to a lessee lease default, its lease profit. ?Some lessees, however, want the right to terminate a net lease early if the equipment in question becomes obsolete or surplus to their needs, or simply for convenience. The same may be true for equipment subject to a conditional sales arrangement, often referred to as a “CSA”. An early lease termination option may be negotiated in advance and granted and, if granted, it is typically costly for a lessee.

Generally, when a right to terminate a lease or CSA early is granted, it is permitted only upon payment of an amount equal to a predetermined termination value, typically stated in a termination schedule. The termination payment is usually expressed as a percentage of equipment cost for each rent or CSA payment period when a termination can be exercised. For example, a monthly lease might provide for a termination payment of 85% of equipment cost when the sixth rent payment is made, 83% of the equipment cost when the seventh rent payment is made, and so on. Properly structured, the payment of a lease termination amount will return to the lessor or the CSA provider the entire remaining equipment cost investment, with the lessor’s/CSA provider’s anticipated profits at least to the date of termination. It will also include additional money necessary to pay off any lessor/CSA equipment purchase loans, any tax benefit recapture for taxes claimed, but not fully vested, and add as additional profit an exercise penalty. In effect, the lessor or CSA provider is made, at a minimum, financially whole as of the termination.

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