In a lease, the lessor owns the equipment and the lessee must surrender it at the end of the lease term. Many leases include a purchase option under which the lessee may purchase the equipment at the end of the lease term.  The purchase prices for off-lease equipment is whatever the parties agree in advance and should be clearly stated in the lease or a signed addendum. 

In some cases, the purchase option price is $1 or another nominal amount.  This means that the transaction is not a lease at all but actually a form of loan and the lesseeowns the equipment. In other words, even though the document might be called a lease and say that the lessee only acquires the equipment at the end of the lease, the law makes it clear that the lessee is the owner and the lessor is merely a lender if the terms of the agreement provide for a nominal purchase option.

 Do not let a lessor tell you otherwise;  in these “leases”, the equipment belongs to you subject to your performance of the terms of the lease. 

Obviously, if equipment already belongs to you, you should not ever agree to extend the term of the lease, which is essentially agreeing to pay additional principal and interest under a mortgage after you have paid off the loan.  This is discussed elsewhere in www.lessess.net.

In other leases, the parties agree that the lessee must pay a substantial amount of money to buy the equipment from the lessor when the lease ends. This purchase price can be stated as a dollar amount, as a percentage of the original equipment cost, or as “fair market value.”

Where the lease provides for a fair market value purchase option,  the lessee should be very careful as to how that term is defined.  Some leases state that fair market value is an amount determined by the lessor, which can obviously lead to mischief.  Fair market value is supposed to be the amount that a purchaser and seller on the open market would agree is the price of the equipment.  If the language is not carefully drafted, the lessee may find itself facing an unreasonably high purchase price. 

There are many variations on the purchase option arrangement. Some make the purchase option meaningless as a practical matter, leaving the lessee at the lessor’s mercy. Others actually force the lessee to purchase the equipment or to extend the term of the lease. Others require the lessee to purchase if it does not enter into a new lease for similar equipment with the lessor.

Another important note is that most leases require the lessee to give advance notice before it exercises the purchase option.  It is absolutely essential that those time periods be placed on the calendar so that you will not miss the requirement of notice.  Also, notice must be in writing and in accordance with the terms of the lease, which often means registered mail or some other means.  Never rely on a telephone call or even an email unless the lease permits notice in that fashion. 

At least in theory, if the lessor agrees to a nominal purchase option, the rent will be higher than if the lessee must buy the equipment at the end of the lease for a significant amount of money. Some lessors will quote a high rent, based on a $1 purchase option, and substitute a lease with an expensive or vague purchase price. This can result in your paying twice for the equipment: once through rents that equal the cost of the equipment and again for what it is worth at the end of the lease, or even more than that.

If you believe that the purchase option is different from what you were led to expect, you should seek legal counsel immediately.