BLM25120 | Defining long funding leases: miscellaneous definitions: term of a lease: 'reasonably certain': example 2 - portfolio of similar leases

Many lessors have a portfolio of similar assets under many individual leases to many lessees.

In some such lease portfolios a large proportion of lessees may opt to extend the lease beyond 5 years. The lessor may have no idea which lessees will extend the lease term but, based on past experience, it knows that it is probable that a particular - perhaps large - proportion of the lessee population will extend the lease term beyond 5 years.

For example, if past experience shows that X% of lessees extend the lease term to more than 5 years it is reasonable to infer that any one lease has an X% probability of the lessee extending the lease term beyond 5 years.

As long as not more than 80% of the lessee population is expected to extend their leases for more than 5 years then - in the absence of information on a specific lease - you should not regard any one lease as reasonably certain to extend beyond 5 years.

In some cases many similar assets will be leased to one user under a single lease and some may end up being leased for more than 5 years. The same principles should be applied as with many leases, each for a single asset. As long as not more than 80% of the assets are expected to be leased for more than 5 years then - in the absence of information on specific assets - you should not treat the lease as one with a term that is reasonably certain to extend beyond 5 years. Note that here each asset is, or could be, the subject of a derived lease (see BLM20300) and treating the lease as a single lease is no more than a convenient and pragmatic approach.

In considering this issue, you should bear in mind that there is a difference between ‘hope’ and ‘expectation’. A lessor may hope that the majority of a particular population of lessees will opt to extend their leases for a term of more than 5 years. But, by itself, this does not amount to reasonable certainty that they will do so. In contrast, if a particular type of asset has been leased out for (say) the last 6 years and experience shows that more than 80% of the leases entered into in year 1 were extended to more than 5 years then, assuming no other factors need to be taken into account (such as leases entered into in year 2 terminating after 3 or 4 years), then it is reasonably certain that leases of the same type which are entered into in year 7 will to be for a term of more than 5 years.