Definition of "Open-end lease"
The definition of an open-end lease is what happens when someone rents a property for a monthly rate with the added obligation to make a large final payment when the agreement is over to purchase the asset. This means that if the asset’s value depreciates, the lessee must pay the difference to the lessor. The open-end lease definition connects the two parties involved - the lessee and the lessor - through a rental agreement, also known as a “finance lease”.
What does an Open-End Lease mean?
An open-end lease is a lease contract that provides a final additional payment on the return of the property to the lessor, adjusted for any value change. The final payment will cover the difference between the initial price of the asset and the end evaluation of the asset. These types of leases are prevalent in commercial transactions for vehicles that a company uses for a limited period of time. They can, however, be used by both commercial and individual entities, most commonly for the purchase and lease of vehicles, but it is also used for real estate lease or rental.
How does an Open-End Lease work?
An open-end lease agreement gives the lessee the chance to purchase the property by paying the monthly payments and the final payments when the agreement is over. The lessee buys the asset once the lease expires, which means that any depreciation of the asset’s value, any decrease in value of the asset will cost the lessee.
Unlike the closed-end lease, an open-end lease agreement does not impose any limitations on the mileage that is offered by the terms of the lease. An open-end lease is also more flexible for the lessee and has fewer instances of additional fees added, besides the final payments of the lease.
However, the lessee assumes the risk that the asset can depreciate over time, and that difference has to be paid by the lessee, working in reverse from the closed-end lease. The lessor purchased the property at a specific price, and in a few years of use by the lessee, the value of the property depreciated. The lessor must regain the difference in value, and the lessee is the one who pays.
Example of Open-End Lease
In an open-end lease agreement, The Johnson’s leases a car that is evaluated at the $20,000 price, assuming that the vehicle will be assessed at $10,000 when the lease expires. The vehicle is leased for two years, and two years, The Johnson’s pay their monthly lease payments. After those two years, the car’s value depreciated and is evaluated at only $4,000. The Johnson’s buy the vehicle for the assumed price of $10,000 and lose $6,000 of the depreciated value. Or, the value might have depreciated less or even appreciated if it is a limited model and The Johnson’s might wind up making a profit, in which case the lessor will refund The Johnson’s at the end of the lease.
Have a question or comment?
We're here to help.