Bargain Renewal Option


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.

BREAKING DOWN '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.

  1. Bargain Purchase Option

    An option in a lease agreement that allows the lessee to purchase ...
  2. Operating Lease

    A contract that allows for the use of an asset, but does not ...
  3. Lease

    A legal document outlining the terms under which one party agrees ...
  4. Capital Lease

    A lease considered to have the economic characteristics of asset ...
  5. Leaseback

    An arrangement where the seller of an asset leases back the same ...
  6. Lessee

    The person who rents land or property from a lessor. The lessee ...
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