Take-or-Pay Lease

A contract where the buyer must either take delivery of a service/product or pay a penalty fee if they do not.

A take-or-pay lease or contract is a binding agreement where the buyer is obligated to either take physical delivery of a service or product (such as data center capacity, natural gas, or pipeline volume) or pay a specified penalty fee to the provider if they fail to do so. This structure guarantees a baseline level of revenue for the seller, regardless of whether the buyer actually utilizes the contracted capacity. For investors, companies with large take-or-pay backlogs offer highly predictable, defensive cash flows. This contract structure significantly lowers the commercial risk for capital-intensive businesses, such as infrastructure developers, energy midstream operators, and utility providers, making it easier for them to secure project financing. While these contracts provide excellent revenue visibility, investors must monitor counterparty risk. If a major customer faces financial distress or bankruptcy, the take-or-pay guarantee may become unenforceable, leaving the seller with idle capacity and a sharp drop in expected cash flows.

An AI data center operator signs a 10-year take-or-pay lease with a tenant for 100 megawatts of power capacity at $1,000,000 per megawatt annually. In year three, the tenant only utilizes 60 megawatts of capacity. Under the take-or-pay terms, the tenant must still pay the operator for the full 100 megawatts: 100 megawatts $1,000,000 = $100,000,000.