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What is a Lease Term?

Written by Debtbook Team | Apr 1, 2024 3:27:45 PM

Municipalities lease land, buildings, and equipment

The lease term is a set period of time in which the lessee (the entity leasing the property or equipment) and lessor (the entity that owns the leased property) are bound to meet the conditions of the lease. The lease term will be included in the lease agreement, along with other key information, such as the lease start date, lease payments, late fees, and renewal options. 

The lease term, also known as the lease period, is explicitly stated in the agreement. There are two key lease terms: fixed and periodic (or indefinite). Fixed lease terms set an amount of time, such as one year or 30 years. Fixed leases have definite start and end dates — with the agreement in effect for a set period of time. 

Indefinite leases (or periodic leases) lack a set lease term. There's no lease end date. Instead, the lease can be ended by the lessee or lessor by giving notice. This can happen when a lease with a set term, such as one year, converts to a month-to-month lease at the end of that year. Keep in mind that month-to-month leases do not qualify under the GASB 87 standard.

Example:

A municipality agrees to lease a piece of equipment for 48 months. The lease is a fixed term, and the lease agreement provides the details, such as the lease start date and a monthly lease payment. In this case of this lease, the lease term is 48 months, and the lease end date is 48 months after the lease start date. 

What’s important here?

The lease term lays out the period of time that the lessee has the right to use the underlying asset. The lease term is in the lease agreement, along with the lease state date, payment amount, and other special conditions. Lease terms can last for a set period —  a fixed-term lease — or can end at an undetermined time — periodic or indefinite. 

Leases with a specified term will end on a certain date, while leases that convert to month-to-month after a set period will continue indefinitely — until either party gives the other notice to cancel the lease.