The Monetary Risks and Benefits of Long-Term Leases

February 4, 2016 Published by
Post Categories: Risk Management

Business owners in Ontario often find themselves having to make choices with important consequences for their companies. A poorly thought out decision could lock a company into an unfavourable agreement or contract for a very long time. On the other hand, a good decision could provide a firm with a long-term strategic advantage, which can then be used to improve its bottom line. One concrete example of this kind of choice is when an owner has to set and negotiate the period of time for an important lease agreement. This could involve the lease of land by a company that engages in farming. Or a firm might need to lease a property to use as a warehouse for its goods. Further still, a company may need to lease equipment to continue to operate its business. However, there are some risks, as well as advantages, to business owners who decide to utilize long-term leases. Some of those risks and benefits are discussed here. 

The upside of long-term leases

There are some advantages to negotiating a long-term lease agreement. For example, a long-term lease can offer greater price stability by preventing the property owner from increasing applicable rates over the lifetime of the lease. A long-term lease can also ensure that your company will not be unceremoniously asked to leave, because another, larger firm wishes to rent the same property. However, it is also important to emphasize that long-term leases create monetary risks as well, which can offset any advantages.

Downside #1: Higher Costs

One significant monetary risk is the fact that a long-term lease may prevent you from taking advantage of more favourable conditions or terms that may arise later. For instance, your firm may take out a long-term lease on a particular property. If, however, a construction boom in the area results in an abundance of similar properties now being offered at a much lower rate, you will not be in a position to take advantage of this. Since you are locked in to a long-term lease, you will be forced to pay higher rates for older premises.

Downside #2: Management Decision Inertia

Another monetary risk of long-term leases is that you are essentially committing your company to certain management decisions, which may later prove to be problematic. For example, your farming company may have previously decided to focus on crop A and, in line with this, it took out a long term lease on arable land suitable for that crop. If, later on, this decision is deemed to be a mistake, and it is decided that crop B would be a much better option, the company will find itself in a difficult situation.

All in all, the monetary risks of long-term leases are very real. Money can be lost because a company is locked into a poor decision or unfavourable financial terms. It therefore becomes imperative on the part of business owners to study these types of lease contracts very closely before committing to a course of action. At Hogg, Shain & Scheck, our professional accounting team can help you in the decision process of a long-term lease. Call us today to speak to a representative and schedule an appointment.