Lease Term Definition
Defined as the period of time in which a contracted lease is in place, lease term establishes the time period to both the lessee and lessor. Lease terms generally come on 3 forms: fixed, periodic, and indefinite. Additionally, a lease can cover either material or non-material property. An example of this would be a real estate lease as compared to a software lease.
Lease Term Explanation
Lease term, explained to many as the period of time where they have usage rights to a piece of property, is a deeper concept than this. It forms part of the lease term sheet, the document which spells out the entire lease agreement. Lease term, also known as lease tenure, lease period, and more, is merely a part of this agreement. Still, it serves as the basis and arguably most crucial aspect to any lease.
Lease term can last for a specific period of time (fixed), can be extended at the will of both parties (periodic), or can last for an undetermined period of time (indefinite). Additionally, leases can exist as either capital or operating leases. Here, these leases would be casually referred to as “lease-to-own” or “rental”. These two leases often create a lease term which is differed by the needs of both parties. Capital leases, often, are not at will, periodic, or indefinite. Operating leases, on the other hand, can be more lax on time expectations while more specific to the rights of the tenant. Naturally, the soon-to-be property owner will begin negotiations with more clearly defined rights than the soon-to-leave renter. The flexibility of leases negates mathematical calculations on a lease term calculator. Negotiating leases is as much an art as a science.
Lease Term Example
Tex, an entrepreneur from Texas, has been quite successful as a “land man”. With a keen eye, a good team, and a little luck he has gained the mineral rights to several properties which are oil rich. Finding and tapping the natural resources that the land offers has created a mutually lucrative environment for both Tex and the property owners he leases from.
As a part of his business, Tex works with all kinds of leases. Based on his research, the work of his team of geologists, his legal counsel, and his sense of adventure, Tex decides which lease term options to take part in. Tex is now working with two property owners.
First Property Owner
One, Louie, has a property with a small well. This well, close to the surface of the land, can be easily accessed by the equipment Tex uses. Tex has encouraged Louie to get his land appraised so that the two men can make an agreement which benefits both parties. It is now time to negotiate the lease to the mineral rights of the land. At the table, Tex expresses that he is interested in an indefinite operating lease on Louie’s land. Tex thinks the well will be tapped within a couple years but wants to hedge his bet by keeping rights until the job is finished.
The two men agree and begin to decide on the terms of the lease. They decide on fixed payments, rights of use on Louie’s property, and that the lease will be at will. To ensure that he maintains use for as long as he needs, Tex includes a commission plan which gives Louie a percentage of the income made from the oil in this commercial lease term sheet. As Tex puts it, “you can catch a cow better with sweet feed than with sour grapes”.
Second Property Owner
Next, Tex begins talks with another property owner known as Okie. The two men meet at the table after each has performed the proper due diligence on the property. The findings indicate that there is little limit to the oil that can be gained from this property, though it is deep into the earth. Being a man with many projects, Tex opts for a capital lease rather than buying the property outright. This allows him to eventually own the property while gaining profits from it now.
Okie sees this as a fair trade and the two men begin the specifics of the agreement. They discuss duration until ownership is transferred, the amount of regular payments, and more. It is decided that Tex will start a balloon payment schedule, where he makes minimum lease payments until the end of the lease where he pays much of the property off in a large, final payment. He will sweeten the deal by paying slightly more to Okie for his property than he normally would. The two men agree and complete the lease term agreement.
Tex is satisfied with the two deals he made. He knows that each serves a certain place in his company. Tex also knows that he has given a fair deal to Louie and Okie. To Tex, everything has gone according to plan. He begins the cycle anew by reviewing an equipment lease term sheet that has been placed on his desk.