Bargain Renewal Option
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Definition of 'Bargain Renewal Option'A clause in a lease agreement that gives the lessee the option to renew or extend the original lease on an asset at rates well below market rates. The inclusion of such a clause would require the lessee to classify the lease as a capital lease rather than an operating lease. |
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Investopedia explains 'Bargain Renewal Option'For example, assume a lease agreement on a property gives the lessee the option to renew it at a monthly lease rate of $10,000, whereas the prevailing market rate is $15,000.Since a capital lease confers some of the rights of property ownership upon the lessee, as opposed to an operating lease which is purely a rental arrangement, there are significant differences in the accounting treatment of the leased asset and lease payments for capital leases and operating leases. |
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