What is a 'purchase option' in a lease?

A 'purchase option' in the context of a lease is a clause that gives the lessee the right, but not the obligation, to buy the leased asset at the end of the lease term, often at a predetermined price. This option can be an important aspect of a leasing agreement as it provides flexibility to the lessee, allowing them to potentially acquire the asset for a favorable price if they find it beneficial after the lease period.

This provision is crucial because it can influence the lessee's decision-making regarding the use of the asset during the lease and allows the lessee to avoid further obligations or investment if they choose not to exercise the purchase option. The value of the purchase option can also affect the financial structure of the lease, as it may lead to different tax or accounting treatments compared to a lease without such an option.

In contrast, the other options do not accurately represent what a purchase option entails. A provision that requires the lessee to purchase the asset would eliminate flexibility and is not characteristic of a purchase option. Similarly, a discount on future rentals or a right for the lessor to terminate the lease does not relate to the concept of a lessee's option to buy, making those options incorrect in this context.