Defining long funding leases: funding leases that are not long funding leases: short leases: example
A lease is entered into and commences on 1 June 2007 for a period of 78 months ending on 30 November 2013. Payments are made under the lease as follows.
|1 June 2007||1,000|
|1 June 2008||5,000|
|1 June 2009||5,400|
|1 June 2010||5,800|
|1 June 2011||5,400|
|1 June 2012||4,000|
This is analysed as follows:
|First reference year||2/6/07 - 1/6/08||5,000|
|Second reference year||2/6/08 - 1/6/09||5,400|
|Third reference year||2/6/09 - 1/6/10||5,800|
|Fourth reference year||2/6/10 - 1/6/11||5,400|
|Fifth reference year||2/6/11 - 1/6/12||4,000|
|Sixth reference year||2/6/12 - 1/6/13||2,000|
|Final year||1/12/12 - 30/11/13||2,000|
Note that the payment on the first day of the lease is ignored and that the payment due on 1 June 2012 features twice.
The lease is a short lease because
- the rentals in the first reference year are only 7.4% less than the rentals for the second reference year (£5,000 is 92.6% of £5,400), and
- none of the rentals payable in the third to sixth reference years and final year is more than 10% greater than the rentals due for the second reference year.
Assuming the rental in the first reference year remained at £5,000, then if the rental in the second reference year had exceeded £5,555.55 the lease would have been a long funding lease.
Assuming the rental in the first reference year remained at £5,000 and the rental in the second reference year was £5,400, the lease would have been a long funding lease if the rentals in any of the other reference years or the final year were more than £5,940.
The effect of the rules is to allow a low initial rental on day 1 but otherwise only to allow small increases in rentals over the term of the lease.