BARGAIN RENEWAL OPTION

A clause in a lease agreement that gives the lessee the option to renew or extend the original lease on an asset at rates well below market rates. The inclusion of such a clause would require the lessee to classify the lease as a capital lease rather than an operating lease.

For example, assume a lease agreement on a property gives the lessee the option to renew it at a monthly lease rate of $10,000, whereas the prevailing market rate is $15,000.

Since a capital lease confers some of the rights of property ownership upon the lessee, as opposed to an operating lease which is purely a rental arrangement, there are significant differences in the accounting treatment of the leased asset and lease payments for capital leases and operating leases.