## Lease Payments and Minimum Lease Payments (MLP)
The components that make up MLP differ between the lessor and the lessee — specifically in how Guaranteed Residual Value (GRV) from a third party is treated.
At the end of the lease term the asset has a remaining (residual) value. A guarantee ensures the lessor receives at least this amount.
Guaranteed by lessee: Lessee bears the shortfall risk → included in both lessor's and lessee's MLP.
Guaranteed by 3rd party: 3rd party bears the risk, not the lessee → included in lessor's MLP only; excluded from lessee's MLP.
### Intuition
MLP represents payments the lessee is obligated to make. A 3rd-party guarantee is not the lessee's obligation — it is someone else's promise to the lessor. Hence the lessee excludes it.
Worked example
### Example 1
AK Sir (lessor) gives Ferrari on lease to Aadit (lessee) for 3 years at ₹30L p.a. Flipkart (3rd party) guarantees a residual value of ₹18L at the end of year 3.
Year
Lessor's MLP
Lessee's MLP
1
₹30L
₹30L
2
₹30L
₹30L
3
₹30L + ₹18L = ₹48L
₹30L (3rd party GRV excluded)
### Example 2
AK Sir (lessor) gives Ferrari on lease to Aadit (lessee) for 3 years at ₹30L p.a. Aadit (lessee himself) guarantees a residual value of ₹15L at end of year 3.
Including 3rd-party GRV in the lessee's MLP — only the lessee's own guarantee is included in lessee's MLP.
Forgetting to add the purchase option payment to MLP when the lessee is reasonably certain to exercise it.
Treating contingent rent as part of MLP — contingent rent is excluded from MLP by definition.
Bare-Act text Para 3(g) — Minimum Lease Payments · AS 19 · click to expand
Minimum lease payments are the payments over the lease term that the lessee is, or can be required, to make excluding contingent rent, costs for services and taxes to be paid by and reimbursed to the lessor, together with: (a) in the case of the lessee, any residual value guaranteed by or on behalf of the lessee; or (b) in the case of the lessor, any residual value guaranteed to the lessor by: (i) the lessee; or (ii) a party unrelated to the lessor.