Finance Leasing Manual - FLM12.22

No secondary period: assets with residual values

It is possible for a lease of a chattel (such as an aircraft or ship) to contain no provision for a secondary period although the asset is still very valuable at the end of the primary period. The trader may decide he only needs finance for the ship for ten years but the ship has a 25 year life. In these circumstances the trader (the lessee) is unlikely to be prepared to pay out rentals over the ten year primary period equal to the cost of the ship plus interest on the loan, unless he gets the full economic rights to the asset. So, if there is no provision for a secondary period, there should be provision for the lessee to get a rebate of rentals, when the lease ends, equal to the market value of the ship.