Lewis’s management has been considering movingto a new downtown location, and they are concerned that these plans may come to fruition priorto the equipment lease’s expiration. If the moveoccurs then Lewis would buy or lease an entirelynew set of equipment, so management wouldlike to include a cancellation clause in the leasecontract. What effect would such a clause haveon the riskiness of the lease from Lewis’s standpoint? From the lessor’s standpoint? If you werethe lessor, would you insist on changing any ofthe other lease terms if a cancellation clause wereadded? Should the cancellation clause containprovisions similar to call premiums or any restrictive covenants and/or penalties of the type contained in bond indentures? Explain your answer.
Lewis’s management has been considering moving
to a new downtown location, and they are concerned that these plans may come to fruition prior
to the equipment lease’s expiration. If the move
occurs then Lewis would buy or lease an entirely
new set of equipment, so management would
like to include a cancellation clause in the lease
contract. What effect would such a clause have
on the riskiness of the lease from Lewis’s standpoint? From the lessor’s standpoint? If you were
the lessor, would you insist on changing any of
the other lease terms if a cancellation clause were
added? Should the cancellation clause contain
provisions similar to call premiums or any restrictive covenants and/or penalties of the type contained in bond indentures? Explain your answer.
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