Municipalities use both cancelable and non-cancelable leases.
Whether a lease is cancelable or non-cancelable will be in the lease agreement. The non-cancelable lease period is the minimum lease term that both parties must abide by the lease agreement. The total or maximum lease term includes all non-cancelable lease periods and extension option periods.
Non-cancelable leases cannot be canceled, and cancelable leases may have non-cancelable periods where neither the lessee or lessor can end the lease. Changes to the lease terms, such as updates to non-cancelable periods, can always be made by agreement of both parties.
Meanwhile, a lease may have a cancelable period — also known as an early termination period. Early termination periods can last for various periods of time or require a period of notice — for example, a lease with an early termination or cancellation option may provide that either party can end the lease by issuing a 30-day notice.
A non-cancelable period covers the timeframe that neither party can cancel the lease. For example, if a municipality has a right to cancel the lease after 60 days, the non-cancelable period is 60 days.
If a lease has an early termination period, that will be included in the non-cancelable period. Say a municipality signs a three-year lease and after the first six months the entity can give 30 days’ notice to cancel the contract. The non-cancelable period is seven months — the six months plus the 30 days’ notice.
Example:
A municipality has entered into a one-year lease agreement that's cancelable after 60 days with a 30-day notice. That is, the entity can cancel the lease after a non-cancelable period of 60 days — provided it gives a 30-day notice.
Say the lease has a start date of June 1; the non-cancelable lease period would end on July 31. If the municipality gave its 30-day notice to cancel the lease on July 31, the lease would officially end on August 30.
What’s important here?
The non-cancelable lease period is generally the initial lease term before extension options or purchase options are available. Sometimes both the lessee and the lessor have the ability to cancel the lease (mutual termination clause). In these cases, these agreements are considered cancellable, and they do not qualify for the GASB 87 standard.
