Non-Cancelable Lease Definition – An agreement to lease equipment for a fixed term which can not be terminated for any reason according to the lease agreement.
On good advise, lessee’s advocate wants to provide a thorough understanding of the concept of non-cancelable lease definition. Why would an equipment lease be non-cancelable? The lessor takes on financial risk of default when taking on a lease. In a finance lease, the lessor purchases the equipment to be leased from the supplier (aka equipment dealer). That is, the invoice to the lessor is based on the term and payment of the lease. Recalling the formula for generating a lease payment, one can also calculate the cost of the equipment from the same formula. That is the amount that the leasing company would be invoiced from the dealer upon lease acceptance by both parties.
To Understand why Non-Cancelable lease definition exists consider this:
Suppose the lease cancellation were allowed. The lessor would likely be stuck with partially paid for equipment. In addition, the equipment would be substantially depreciated from the amount the lessor paid for it. The lessor would have to remarket it at a lower value than they paid for it. This type of loss if repeated would result in the leasing company going out of business in the long run. So why doesn’t the lessor recover its losses from the equipment dealer if a lease is canceled? That takes us into an area that falls under the definition of non-recourse lease.
Any term in a lease contract may be rescinded by court ruling, arbitration or other legal judgment. However, it should be recognized that the time to consider whether a lease is non-cancelable is before signing the contract. Once signed, the burden of proving a legal case for cancellation falls on the lessee at their own expense.