Understanding the various terms and conditions of a lease contract before you sign can save you a lot of heartache and money in the long run. Those business owners who have never leased equipment may think the contract is just a formality and that their only obligation is to make the lease payments on time. Nothing could be further from the truth.
Leasing companies, like any other business, operate to make profits and will do everything they can (usually within ethical and/or legal boundaries) to protect their interest. The lease contract will likely contain many clauses that allows the lessor to accomplish this goal. While a lot of these clauses may not be detrimental to you as a lessee, it is probably worth the expense to have your attorney review the contract in its entirety.
Here are some of the typical clauses that you should be cognizant of:
- Triple net leases - This means that the lessee is responsible for many of the expenses associated with the equipment. These expenses include property and causualy insurance, which protects both the lessee and lessor from destruction of the equipment to claims arising from someone getting injured or killed from the equipment's use. The lessee is also expected to maintain the equipment in good working order. Sales tax and personal property tax are the responsibility of the lessee in a triple net lease.
- Personal Guarantees - More and more leases are expecting the company's principals to guaranty the performance of the lease. In other words, if the company defaults on the lease, the lessor has the right to place an immediate demand on the principals to cure the delinquent payments. This clause is advantageous to the lessor because they can bypass the court proceedings and go directly to the guarantors.
- Assigning of the Lease - Lessors are often given the right in leasing contracts to assign the lease to another party. This does not change the terms and conditions of the contract, so it 's typically not that big of a deal. The lessee, on the other hand, should determine if the lease contains a clause that allows them to assign their rights and obligations to a third party. This can be significant to those companies that no longer have a use for the equipment and therefore don't want to keep paying on it. It should be noted, however, that in most cases, assignment of the lease does not take the original lessee off the hook in regard to the lease obligations.
- When the lease ends - This is one of the most important provisions in the lease contract, so make sure you understand it. There are a myriad of options potentially available to the lessee at the end of the contract. Some leases state that the equpment can be purchased at "market value", at a stated price, returned to the lessor, or continue leasing on a month by month basis after the term ends. These points can be negotiated, so try to have a good idea of your goals for the equipment when the lease ends.
I've only touched on a few of the many considerations when evaluating a lease. It should be reiterated that paying an experienced attorney to thoroughly review the lease can pay dividends.
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