Introduction: Commercial substance and structure: Finance leases: rebates of rentals
A finance lease is a lease that transfers substantially all the risks and rewards of ownership of the asset to the lessee. At any time from the end of the primary period (and sometimes from an earlier point) the lessee is therefore generally entitled to require the lessor to sell the asset and pay the majority (often over 99%) of the net sale proceeds to the lessee by way of rental rebate. The net sale proceeds are the sale proceeds less any amount that might be due by way of rent.
The lessor is usually entitled to retain only a trivial proportion of the net sale proceeds. In addition to this retention the lessor is also entitled to ensure that, if the need arises, it recoups its capital investment plus interest on the outlay either out of the sale proceeds or by way of a further ‘termination rental’.
The object of both the rebate of rentals and the termination rental is to ensure that the lessor recoups its net cost plus an amount that is equivalent to interest on the loan.
Exceptionally, the lessor might seek additional payments where a lease is terminated early.