The three forms of lease terms
The three forms that a lease term can take include:
- Fixed term – The lease lasts for a specific amount of time, such as 24 or 48 months.
- Periodic term – The lease has a commencement date but no expiry date and includes an option to extend at the end of a predetermined period if both parties agree.
- Indefinite term – The lease has no end date and will continue for an unknown period.
Example:
An example of a fixed lease term is leasing a building at $1,500/month for 24 months.
An example of a periodic term is leasing a storage unit for $500 a month, with the option to continue for another month in perpetuity. The lease ends when either the landlord or tenant gives notice.
An example of an indefinite term lease is a subscription to office supplies, where the subscription renews automatically until the lessee stops making payments. Non-material property like office supplies is more likely to have an indefinite lease term than material property like a building.
What’s important here?
The lease term will typically be specified within the lease agreement. To find it, carefully examine your lease agreement and search for the following:
- The agreement explicitly says that the lease term is for a number of months, like 12, 24, or 48. This is a fixed term lease.
- The agreement includes a “month-to-month” clause stating that you are liable for payment for one month and have access for one month, with lease termination available at the end of each month, at the unrestricted will of either party. This a periodic term lease. Please note these month-to-month leases will not qualify for the GASB 87 standard.
- The agreement does not include a “month-to-month” or fixed term clause but does list the number of payments required due over the term of the lease. This is an indefinite term lease.