What is a termination fee in leasing?

A termination fee in leasing refers specifically to a charge that is incurred when a lessee decides to end the lease agreement before the agreed-upon term has been completed. This fee serves to compensate the lessor for potential losses associated with the early termination, such as the inability to rent the asset to another customer during the remaining lease period.

In many leasing contracts, the specifics of how a termination fee is calculated and applied are detailed in the lease agreement. This fee might take the form of a percentage of the remaining lease payments or could be a fixed amount stipulated in the lease document.

The other choices align with different aspects of leasing but do not accurately define the concept of a termination fee. Late payment fees relate to overdue payments, deposits are typically security measures to protect against damage or ensure compliance with lease terms but are not termination-related, and damage penalties pertain to the condition of the leased asset upon its return rather than the decision to terminate the lease early.