Finance Leasing Manual - FLM12.80

Terminal rebates: operating leases

It should also be noted that terminal rebates under a finance lease (as with terminal rents) are distinguishable from the sort of terminal payments typically made under operating leases. The difference in treatment arises out of the divergent economic relationships between the parties.

The terms of a finance lease are normally such that the net rentals (monthly rentals plus termination rental less any termination rebate) paid by the lessee are no more than the economic cost of using the asset over the expired lease period. The fact that this net cost may not be measured until the lease is terminated does not, of itself, alter the character of such payments.

However if, as may well be the case under an operating lease, the lessee has already paid - month by month - the full economic cost of using the asset, any further payment to terminate the lease is, almost by definition, penal. It is a (capital) payment to terminate the lease, see FLM12.81.