Transport for London has signed a leasing contract for its new London Overground fleet of electric trains.

Leasing, rather than borrowing to buy the fleet of 188 vehicles, will avoid a capital expenditure of £250 million and release millions of pounds for reinvestment in the Capital's transport network.

The overall costs of leasing or buying the fleet remain approximately the same, but with a leasing arrangement Transport for London will not bear the cost of the depreciating value of the fleet and the risk of a loss if selling second hand rolling stock.

Trains for the new London Overground network will be leased from QW Rail Leasing Ltd, a joint venture between National Australia Bank and Sumitomo Mitsui Banking Corporation.

The contract will give Transport for London use of the trains until 2027 or longer if it wishes. This differs from the usual rolling stock lease in the UK, which last only as long as a train operator's franchise.

Under the terms of Transport for London's contract they will not have to renegotiate terms for using the same trains when the contract expires.

In 2027, when the fleet is half way through its economic life, Transport for London will have the option of taking on a second lease or entering into a new agreement with another party for other more up-to-date trains.

There is also an option for Transport for London to extend the fleet to 216 vehicles, comprising 54 4-carriage trains

Managing Director of London Rail, Ian Brown, said: "This contract gives us all the best features of a new train fleet, including reliability, extra capacity and cleanliness. It also gives us much greater flexibility about when we wish to renew the trains in future and releases funds for investment in London's transport network."

London Overground Rail Operations Limited, the London Overground operator, has also confirmed that an order for a new generation of diesel trains has been placed with Bombardier. The trains will be manufactured for Angel Trains who will lease them to London Overground. The eight Class 172 trains will be delivered from the end of 2009.