Closed End Lease - Explained
What is a Closed-End Lease?
Written by Jason Gordon
Updated at April 4th, 2023
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Back To: Real Estate, Personal, & Intellectual Property
What is a Closed-End Lease?
A closed-end lease is a contractual agreement that allows an individual (lessee) to use a property for a particular period while making periodic lease payments without an obligation to buy the property at the end of the contract. Close-end leasing is a lease agreement approved by the law of the United States and Canada. Once a leasing contract expires, the lessee is allowed to walk away without being mandated to purchase the property used for a period of time. A lose-end lease is otherwise called a net lease, true lease or walkaway lease.
How Does a Closed-End Lease Work?
A closed-end lease can be entered for the lease of any property or asset, including vehicles, machinery, facility or an apartment. When the lessee and the lessor enter this agreement, it means the lessee can exit the agreement at expiration without any obligation to purchase the property. This, however, does not mean that the lessee cannot purchase the property if interested. In the U.S and Canada, the lessee can buy the property at an agreed residual value at the expiration of the fixed period of the lease. In a car lease, for instance, the lessee can return the car at the end of the lease period and is not under the law to buy the car, this is why this rental agreement is often called a walkaway lease.
How Closed-End Leases Are Structured
In a closed-end lease, there is a fixed term for which a lessee will use a property, during this period, the lessee is expected to make fixed payments which can span for 12 to 48 months. There are other fees that a lessee might incur which are not stated in a closed-end lease agreement, for instance, if a lessee uses a vehicle that exceeds the stipulated limits, the lessee is obligated to pay the fines attached. Exiting a closed-end lease before the expiration date can also attract fine which will be paid by the lessee. Once a closed-end lease expires, a lessee is not obligated to buy the property or asset, the lessee can simply walk away without any obligation.
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