Here you can find a list of definitions for terms associated with leasing. These terms are listed alphabetically, alternatively you can use the find facility within your internet browser (by pressing control + F simultaneously) to search for terms within this page.
Acceptance
See certificate of acceptance.
Acquisition Fee
A security deposit paid by the lessee when signing a lease contract or as part of the monthly rental.
Add-on
New equipment that is added to an existing lease contract for other related equipment. The add-on is financed under the same conditions as the original equipment and their lease periods expire on the same date.
Adjusted Capitalisation Cost (or Net Capitalisation Cost) (USA)
The capitalisation cost decreased by capitalisation cost reduction. The adjusted capitalisation cost is used as the basis for the calculation of monthly rental payments.
Advance Payments (or Payments in Advance)
Payments effected by the lessee at the beginning of the leasing period.
Association Française des Sociétés Financières (ASF)
An organisation which represents the general interests of all specialised financial institutions in France.
Associazione Italiana Leasing (ASSILEA)
The body that promotes and serves the general interests of leasing companies in Italy.
Back-to-Back Lease
An agreement under which an intermediate lessor adopts responsibility for an existing lease and ensures that the final lessee agrees to the lease's criteria.
Balancing Charge
The difference between the sale proceeds of an asset and the tax written down value.
Balloon Payment
A final payment effected on the expiry date of a lease that cancels out any remaining debt associated with the lease. This results in lower periodic rentals during the life of the lease.
Bargain Purchase Option
An option included in the lease contract that allows the lessee the possibility to buy the leased equipment on a specified option date at a predetermined price that is considerably lower than the expected fair market value.
Bargain Renewal Option
A provision in the lease contract offering the lessee the opportunity to renew the contract on a given option date and at a rental rate below the expected fair market rate.
Base Term
See lease term.
Big Ticket Lease
A large-value leasing contract.
Break Clause
A clause in a leasing contract allowing the lessee to terminate the contract during the primary period of the lease.
Broker
An individual or entity acting as an intermediary between potential lessors and lessees in exchange for a fee.
Bundesverband Deutscher Leasing-Unternehmen e.V. (BDL new)
The institution that promotes and represents the interests of the leasing industry in Germany.
Burdensome Buyout (USA)
A clause in a lease that gives the lessee the right but not the obligation to buy the leased asset at a predetermined value in excess of the termination value, or at a value determined when the option is being exercised. This right to buyout is generally used by the lessee if payments under the tax indemnity clause are considered to be disadvantageous or burdensome.
Canadian Finance & Leasing Association (CFLA)
The body representing the Canadian asset-based financing and leasing industry.
Cancel and Return
See early termination.
Capitalisation Cost (Cap Cost)
The purchase price of the leased asset. It also represents the price at which a leasing company buys the equipment from its supplier.
Capital Lease
A type of lease that is considered as an actual sale or purchase if a) ownership of the equipment is transferred to the lessee at the end of the lease period; b) the lessee gets a bargain purchase option to be exercised at a specified option date; c) the lease term is 75% of or longer than the leased asset's useful life; or d) the net present value of the rental payments is equal to at least 90% of the fair market value. Also known as demise hire (USA).
Capped Fair Market Value Lease (USA)
A fair market value lease with a specified price limit to prevent an excess of the fair market value at the end of the lease period.
Captive Finance Company (or Captive Finance Arm)
A finance company and subsidiary whose primary objective is to finance consumer acquisitions of its parent company's products.
Casual Value
See stipulated loss value.
Certificate of Acceptance
A written acknowledgement by the lessee of receipt of the leased asset and acceptance of its conditions, including it being in accordance with specifications agreed before the building or construction of said asset.
CFLA
See Canadian Finance & Leasing Association.
Closed-end Lease (USA)
A lease where the lessor bears the depreciation risk at the end of the lease term. The contracting parties agree an upper limit of the leased asset's residual value. Should the equipment's value be lower than that specified value, the lessor has to assume the depreciation amount.
Conditional Sale
A transaction for the purchase of an asset under which legal title transfers upon fulfilment of the final condition and in which the user may, for tax purposes, be treated as the owner from the outset of the transaction.
Contingent Rentals
Any type of rentals in which the value of the amounts to be paid depends upon some factor other than the passage of time.
Contract Hire
An agreement to hire/lease vehicles for a fixed period against regular rental payments which incorporate the anticipated cost of maintenance for the hire period and also the final residual value. The lessee also has to observe a number of other contractual obligations (e.g. not to exceed a certain mileage). Upon expiry of the contract period, the equipment is returned to the contract hire company.
Contract Purchase
As in contract hire but, upon expiry of the contract period, the lessee has the right but not the obligation to buy the vehicle at the agreed option purchase price stipulated in the contract.
Coterminous
When two or more leasing contracts are connected and expire on the same date.
Cross-border Leasing
Any leasing activity involving parties from different countries.
Defeased Leasing
A leasing contract that includes a condition which protects the lessor from any risk resulting from the failure of the lessee to meet its contractual obligations.
Deferred Lease Payments
In certain lease arrangements, lessees are allowed a payment holiday during the first month(s) (1-6 months) so as to prevent any risk of cash flow problems.
Delivery & Acceptance
See certificate of acceptance.
Demise Hire
See capital lease.
Depreciation
A reduction in the value of a tangible fixed asset over its economic lifetime recorded as an operating expense by the owner of the asset. As an expense, depreciation reduces the asset side of a company's balance sheet and its profits.
Depreciation Fee (USA)
The monthly depreciation cost for the lessee. It is calculated by dividing the net capitalisation cost minus residual value by the lease period expressed in monthly intervals. Also known as monthly depreciation fee.
Disposition Fee
The fee paid by the lessee at the end of the lease term.
Double-dip Lease
A cross-border leasing arrangement in which both parties are classed as owners of the leased equipment for tax reasons by their respective countries.
Early Buy-out Option
An option in a leasing agreement permitting the lessee to terminate the lease and purchase the equipment before expiry of the lease term. The option is only available at (a) predetermined interval(s) during the contract. Not available in UK.
Early Out Option
See early termination.
Early Termination
When a lease is terminated before the scheduled date of expiry. Also known as early out option or cancel and return.
Early Termination Charges
Charges that have to be paid by the lessee if the lessee decides to withdraw from the lease contract before it expires.
Economic Life
See useful life.
Effective Lease Rate
The effective rental rate paid by the lessee on a lease agreement, taking account of the timing and differing size of payments.
Estimated Residual Value
The estimated value a leased asset will have on the expiry of the lease contract.
Equipment Leasing Association of America (ELA)
The body that promotes and serves the general interests of the equipment leasing and finance industry in the USA.
Equity Participant
The lessor or one of the groups of lessors in a leveraged lease. Equity participants hold trust certificates as evidence of their beneficial interest as owners under the owner trust. An equity participant is the same as an owner participant, trustee owner or grantor owner.
Estimated Useful Life
The time period during which a tangible fixed asset is assumed to be useful for the company's operations. The estimated useful life of an asset can be used to calculate the maximum period of a tax lease or to specify the type of lease (e.g. capital lease) or to determine the depreciation method to be applied on the leased asset.
European Federation of Leasing Company Associations (Leaseurope)
The umbrella body comprising the representative associations of the leasing industry in Austria, Belgium, the Czech Republic, Denmark, Estonia, France, Finland, Germany, Greece, Hungary, Italy, Ireland, Luxembourg, Morocco, the Netherlands, Norway, Poland, Portugal, Russia, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey and the United Kingdom.
Extended Term Agreement
A clause in a lease where a third party agrees to renew the lease upon its expiry.
Fair Market Purchase Option
An option given to the lessee to buy the leased equipment at its fair market value on the option date. Should the lessee exercise the option, the title to the asset is automatically transferred from the lessor to the lessee. Not available in the UK.
Fair Market Rental
The rental rate for a given asset based upon the expected return for equivalent assets under similar terms and conditions in the open market.
Fair Market Value Lease
A leasing agreement under which the lessee has the option to renew the contract at the asset's fair market value or to acquire it at the fair market value at the end of the lease period.
FAS 13
The formal accounting standard issued by the US Financial Standards Accounting Board (FASB) and its application to the accounting of leasing and hire-purchase transactions. See Statement of Standard Accountancy Practice 21 (SSAP21).
Fees
Charges paid by the lessee to all possible parties, including banks, dealers and leasing companies that are instrumental in enabling the lease transaction.
Finance and Leasing Association (FLA)
The chief institution in the UK with regard to asset and consumer finance, whose principal objective is to encourage a liberal and competitive market.
Finance Fee
A fee that is paid on a regular interval by the lessee to the lessor for leasing an asset. Also known as lease charge or rental charge.
Financial/Finance Lease
A capital lease that serves to finance the acquisition of property/ equipment. It is non-cancelable by either of the contracting parties and constitutes a full payout lease, i.e. the lessee has to insure the equipment, pay the taxes and arrange for its maintenance.
First Year Allowance
An increased rate of capital allowance available in the first year of an asset's use. It is used to provide an incentive for companies to invest in new equipment.
Fixed Purchase Option (USA)
A purchase option offered to the lessee on a specified option date. The lessee has the possibility to buy the asset at a predetermined or fixed price, which usually equals 10% of the original purchase price of the underlying leased equipment.
FLA
See Finance and Leasing Association.
Floating Rentals
Rentals that change in accordance with market rates.
FRS 5
UK Accounting Standard which covers off-balance sheet financing.
Full Payout Lease
A lease where the lessor is eventually paid back the acquisition, financing and overhead cost of a leased asset as well as a return on investment.
Full Service Lease
A leasing arrangement where the lessor is responsible for the maintenance of and cover of the property/equipment that has been leased. Also known as rental lease.
Gap (Gap Insurance)
An insurance policy taken out by the lessee in order to cover the difference between the balance outstanding on the lease and the market value of the leased asset in the event of an early termination through default or total loss.
Guaranteed Buy-back
An arrangement where a supplier or other party agrees to buy back an asset at the end of the lease or if the lessee defaults during the currency of the lease contract.
Hard Costs
Leased assets that are tangible (e.g. buildings, hardware, machinery, etc). See soft costs.
Hell-or-High-Water Clause
A clause in a leasing arrangement that states that the lessee is obliged to continue paying the lessor, regardless of any change in circumstances from the lessee's point of view or any occurrence that may adversely affect the value of the leased asset.
Hire Purchase
A hiring agreement with an option for the hirer to purchase the goods at the end of the hire period for a nominal figure.
IAS 17
International Accounting Standard for Leasing issued by the International Accounting Standards Board.
Incremental Borrowing Rate
The rate at which the lessee has to raise the funds for purchasing the leased property.
Indemnity Clause
A clause in the lease contract stipulating that the lessee indemnify the lessor against any loss (e.g. loss of tax benefits).
Indenture Trustee
In a leveraged lease, the indenture trustee holds the security interest in the leased equipment for the benefit of the funders. In the event of a default, the indenture trustee exercises the right of a mortgagee. It is also responsible for receiving rentals and disbursing funds to funders and the owner trustee.
Insured Value
See stipulated loss value.
Japan Leasing Association (JLA)
Organisation which promotes the interests and development of equipment leasing companies in the Japan.
Lease
A contract according to which the owner of an asset (the lessor) offers the right to use the asset to another party (the lessee) during a certain period. In return for this, the lessee has to make regular rental payments at predetermined rates to the lessor.
Lease Asset Servicing
See vendor lease.
Lease Charge
See finance fee.
Leaseurope
See European Federation of Leasing Company Associations.
Lease Line
A lease line functions in the same way as a bank line of credit. It permits the lessee to add assets to the existing lease agreement without having to enter into a new contract or negotiate new terms and conditions.
Lease Purchase
A full-payout lease with a lease term related to the underlying asset's estimated useful life and where title of the asset is passed to the lessee at the end of the lease on payment of a nominal figure.
Lease Rate
The rate on periodic rental payments made by the lessee for the use of the leased equipment.
Lease Rate Factor
See net monthly lease rate factor (LRF).
Lease Schedule
A schedule underlying a master lease agreement and providing detailed information on the contract terms, including rental payments and rights with regard to the use of the leased asset.
Lease Term
The length of a lease agreement and the (minimum) period during which the lessee has the right to use the leased asset and has to make rental payments on a regular basis. Also known as base term.
Lease Underwriting
A term used by lessors in assessing the creditworthiness of their potential customer.
Lessee
The party in a lease contract which is given the right to use and to possess an asset owned by the leasing company for a specified period in exchange for periodic rental payments.
Lessor
The legal owner of the asset leased to the lessee for a specified period. The lessor may also be a leasing company that buys the equipment and rents or leases it to other parties. The lessor offers the lessee the right to use the property during the lease term.
Level Payments
Rental payments that remain equal during the term of the lease.
Leveraged Lease
A mainly debt-financed lease agreement in which the lessor provides equity capital, while the rest is financed through a long-term creditor. The long-term creditor does not have any recourse against the lessor. The lessor's investment may decline during the first few years but will rise during the last period of the lease.
Master Lease
An umbrella agreement allowing the lessee to add further assets to the existing lease agreement simply by entering a description of the respective equipment into a supplementary lease schedule. The new schedule is subject to the original terms and conditions of the master lease.
Money Factor
A figure reflecting the monthly financing cost of a lease.
Monthly Depreciation Fee
See depreciation fee.
Net Lease
A lease in which the lessee has to insure the leased asset and is responsible for its maintenance as these services are not provided for in the lease agreement.
Net Monthly Lease Rate Factor (LRF)
The net monthly rental payment expressed as a percentage of the original asset's cost. Also known as lease rate factor.
Non Full Payout Lease
In contrast to a full payout lease, the cash flows earned from this type of lease do not cover the various costs of the lessor such as acquisition, financing and administration costs. In such a case, the lessor relies on its ability to accurately anticipate the residual value of the equipment to make its profit (or it will rely on a guaranteed buy-back e.g. from the original supplier).
Open-end Lease
The opposite of the closed-end lease, a lease agreement that offers the possibility for the lessee to extend the contract term after a certain period of time and at predetermined conditions.
Operating Lease
A lease where the lessee's payments do not cover the full cost of the asset. The operating lease is classed as a true lease (USA). The lease is normally for a period which is shorter than the asset's useful life and the lessor retains ownership of the equipment during the lease term and after it expires. Anticipated maintenance and other costs can also be built into the rental payable by the lessee.
Payment in Advance
A payment condition attached to a lease contract where payments are to be made on a periodic basis at the start of each period.
Payment in Arrears
A payment condition attached to a lease contract where payments are to be made on a periodic basis at the end of each period.
Peppercorn Rent
Payment of minimal value during the secondary period of a finance lease.
Primary Period
The initial period of a finance lease during which the lessee pays rentals which will fully amortise the initial cost of the equipment plus interest. The lessee is committed to paying rentals and fulfilling all other obligations of the lease contract.
Purchase Option
An option permitting the lessee to buy the leased asset at a specified price or at the fair market value at the end of the lease term. See lease purchase, hire purchase.
Purchase Option Price (Purchase Option Value)
The price at which the lessee has the option to buy the asset on a specified date (normally at the end of the lease).
Recourse (Vendor Recourse)
In a leasing context, refers to the lessor's right to return assets to the manufacturer or distributor in the event of a lessee defaulting on payments. The manufacturer/distributor may also be responsible for re-marketing said assets.
Related Parties
Parties involved in a leasing agreement that have a prior link (same group, joint venture, etc). The existence of such a relationship may have negative tax implications.
Renewal Option
A provision in a lease contract giving the lessee the opportunity to renew/extend the contract on a specific option date and at a predetermined rental rate. The option date generally falls just prior to or at the date of expiry.
Rentals
The periodic payments required in leasing agreements. Rentals can be fixed or floating.
Rental Charge
See finance fee.
Rental Lease
See full service lease.
Rental Rebate
A clause often included in finance leases that allows a refund of rentals to a lessee at the end of the lease based on the proceeds of the sale of the leased asset.
Residual Sharing
An agreement between the lessor and another party to divide the residual value of the lease between both parties. If not carefully drawn up, such arrangements may have negative tax implications.
Residual Value
The value of a leased asset upon expiry of the lease contract.
Residual Value Insurance
An insurance that acts as coverage against an unforeseen loss in value of leased property upon expiry of the lease contract.
Right of First Refusal
A clause in some leases that offer the lessee the right of first refusal only if the lessor decides to sell the asset at the end of the leasing period.
Sale-leaseback
The sale of an asset (generally to a leasing company) that is immediately leased back by the owner of the asset.
Sales-aid Lease
See vendor lease.
Salvage Value
The value of the asset when it has been fully depreciated.
Secondary Period
Period following the primary period of a finance lease.
Single Investor Lease (USA)
See full payout lease.
Small Ticket Lease
Low-value leasing contract.
Soft Costs
Leased assets that are deemed to be 'intangible' (e.g. all types of services). See hard costs.
SSAP21
See Statement of Standard Accountancy Practice 21.
Statement of Standard Accountancy Practice 21 (SSAP21)
Issued by the Accounting Standards Committee, SSAP21 is the standard used in the UK when accounting for leases and hire purchase transactions. Similar standards exist in all other major industrial countries. See FAS13.
Step-up/Step-down
A provision in a lease contract according to which the amount of the monthly payments increases (step-up) or decreases (step-down) during the lease period.
Stepped Rentals (Step Rentals)
In a structured lease, rentals can vary during the lease period. Generally, the rental payments increase as the lease period progresses. Step rentals are generally used for tax-savings or cash flow purposes.
Stipulated Loss Value
A schedule in a lease contract recording the book values of the underlying asset during the lease term, the amounts of depreciation, its residual value, possible tax benefits and the obligations of the lessee in case of loss of or damage to the leased property. Provides the sum payable on early termination of a lease. Also known as insured value or casual value.
Structured Lease
A lease where the rentals payable by the lessee are tailored to match the cash flows generated by the assets under lease. Can apply to seasonally used assets e.g. combine harvesters or charter aircraft etc.
Sub-lease
A leasing contract that transfers a number of the lessor's rights to another. This does not affect the validity of the contract between the original lessee and lessor.
Subsidised Lease
A lease that is financed via captive finance companies (or captive finance arms) where an element of the 'sale profit' can be used to subsidise the rentals payable by the lessee.
Tax Indemnity Clause
A clause that is incorporated in a tax-based lease to allow the lessor to adjust rental payments in the event of any changes in the tax regulations in order to maintain the lessor's original anticipated return from the lease.
Tax Lease (Tax-based Lease)
A lease where the lessor benefits from tax depreciation as owner of the assets and builds these benefits into the rentals payable by the lessee.
Tax Variation Clause
A clause inserted into a lease to enable the lessor to vary the rentals if there any changes in the tax rates or system.
Technology Refresh Option
An option in a lease agreement permitting the lessee to upgrade the leased assets at certain intervals of the lease period in exchange for an increase in the original lease term and/or amended payment conditions.
Termination Schedule
The part of a leasing contract that stipulates the value of the leased assets throughout the leasing period. This section is added in case the lease allows the lessee to terminate the leasing contract before its expiry in order to protect the lessor from loss of investment. It values the transfer or resale value of the leased asset throughout the leasing period. If the asset is sold below the price given in the schedule, the lessee is liable for the difference; however, if the asset is sold at a higher price, the lessor keeps that difference.
Termination Value
A provision in a lease that allows the lessee to terminate the lease during the lease term if the leased asset becomes obsolete or does no longer fit in with the lessee's requirements. The cost for the lessee resulting from such a termination is spelled out in the termination schedule.
True Lease (USA)
A general term for a lease that does not require the full cost of the leased payment to be paid during the lease's lifetime and does not entail the transfer of the leased asset upon expiry of the lease period. The fact that, under a true lease, a lessee only pays for a period of the asset's useful life means that most tax authorities consider the lease payments as fully tax-deductible operating expenses.
Upgrade
The sale of leased equipment for a newer or better version.
Useful Life
The period of time during which a property has economic value and can be used. Also known as economic life.
Vendor Lease
A contractual agreement between a vendor of equipment and a leasing company where the latter undertakes to lease the vendor's assets in order to promote the latter's sales. This type of arrangement is comparable to a lease financed via captive finance companies. Also known as lease asset servicing.
Yield
The lessor's return on investment.
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