Where a lease with a term of more than 5 years but not more
than 7 years includes a balloon rental it will not meet the
definition of a short lease. (A balloon rental is a rental payable
at or near the end of the lease term that is materially larger than
previous rental payments.)
The residual value implicit in the lease is the value after
the balloon has been accounted for and so a lease with a balloon
does not meet the test for being a short lease because it fails to
meet the conditions set out in
BLM20515.
For example, a lessor buys an asset for £10,000 and
leases it for 6 years at £1,500 a year with an additional
balloon rental of £5,000 at the end of year 6. The total
rentals are £14,000. The lessee also has the right to sell the
asset (as agent for the lessor) at the end of the lease term and
retain 99.9% of the proceeds.
The lessee will hope that the asset sells for at least
£5,000. In this example it is reasonable to assume that the
residual value implied in the lease is nil. However, the lease
would not be a short lease because it would not meet conditions in
BLM20515.
