BLM20520 - Defining long funding leases: funding leases that are not long funding leases: short leases: example

A lease is entered into and commences on 1 June 2007 for a period of 78 months ending on 30 November 2013. Payments are made under the lease as follows.

Date of Payment Amount Paid
1 June 2007 1,000
1 June 2008 5,000
1 June 2009 5,400
1 June 2010 5,800
1 June 2011 5,400
1 June 2012 4,000

This is analysed as follows:

  Period Rentals Payable
First reference year 2/6/07 - 1/6/08 5,000
Second reference year 2/6/08 - 1/6/09 5,400
Third reference year 2/6/09 - 1/6/10 5,800
Fourth reference year 2/6/10 - 1/6/11 5,400
Fifth reference year 2/6/11 - 1/6/12 4,000
Sixth reference year 2/6/12 - 1/6/13 2,000
Final year 1/12/12 - 30/11/13 2,000

Note that the payment on the first day of the lease is ignored and that the payment due on 1 June 2012 features twice.

The lease is a short lease because

  • the rentals in the first reference year are only 7.4% less than the rentals for the second reference year (£5,000 is 92.6% of £5,400), and
  • none of the rentals payable in the third to sixth reference years and final year is more than 10% greater than the rentals due for the second reference year.

Assuming the rental in the first reference year remained at £5,000, then if the rental in the second reference year had exceeded £5,555.55 the lease would have been a long funding lease.

Assuming the rental in the first reference year remained at £5,000 and the rental in the second reference year was £5,400, the lease would have been a long funding lease if the rentals in any of the other reference years or the final year were more than £5,940.

The effect of the rules is to allow a low initial rental on day 1 but otherwise only to allow small increases in rentals over the term of the lease.