BLM25140 | Defining long funding leases: miscellaneous definitions: term of a lease: 'reasonably certain': example 6 - extending term only sensible commercial option

A ship cost lessor L Ltd £45m. The ship has an expected useful life of 20 years. L Ltd leases the ship to M Ltd for 5 years at £10m a year. After 5 years M Ltd can either

• walk away without being required to pay the lessor anything more, or

• extend the lease term for another 15 years at a rental of £0.1m a year.

On the facts it appears that it would make no commercial sense for M Ltd not to exercise the option and so M Ltd is reasonably certain to exercise the option to extend the lease term.