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Definition: Bargain Renewal Option
Bargain Renewal Option is an option provided in a lease agreement according to which a lessee is able to renew or extend the original lease agreement on an asset at a rate that is much below the market rate.
For including the clause of bargain renewal option, the lessee is required to classify the lease as a capital lease instead of an operating lease.
Let us understand this with the help of an example. Let us assume that the current price of a certain property is Rs. 75, 00,000 but the leasing agreement has a clause for bargain renewal option. The lessee can use this clause to get a lease on the property for Rs. 60, 00, 000. Hence the lessor will have to give the lessee the lease for Rs. 60, 00, 000.