COMMON ERRORS WITH EQUIPMENT LEASES

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Contact Neufeld Legal PC at 403-400-4092 or Chris@NeufeldLegal.com

Lessees often make several common errors when entering into equipment lease agreements, which can lead to unexpected costs, legal complications, and operational inefficiencies. As such, in advance of leasing equipment, it is important to understand some of the most frequent mistakes made by lessees when leasing commercial equipment.

1. Not Thoroughly Reading and Understanding the Agreement:

• Hidden Fees and Charges: Lease agreements can contain various fees beyond the stated monthly payment, such as application fees, origination fees, commitment fees, UCC filing fees, document preparation fees, and processing fees. Lessees often overlook these or don't understand their implications.

• End-of-Lease Obligations: Many agreements have specific clauses regarding the return of equipment, including conditions (e.g., "same condition as delivered" vs. "ordinary wear and tear"), dismantling, packing, shipping, and storage costs. These can be substantial and lead to unexpected expenses or even pressure to purchase unwanted equipment.

• Early Termination Penalties: Lessees often underestimate or fail to understand the high penalties for terminating a lease before its agreed-upon term.

• "Hell or High Water" Clauses: These clauses are common in equipment leases and state that lease payments must continue regardless of any issues with the equipment (e.g., malfunction, unsuitability) or the lessor's performance. Lessees might assume they can stop payments if the equipment isn't working, but this is often not the case.

• Automatic Renewals (Evergreen Clauses): Some leases include clauses that automatically renew the lease for another period (e.g., one year) unless the lessee provides timely notice of termination. Forgetting this can lead to being locked into another lease term.

• Warranty Disclaimers: Lessees might assume the lessor is responsible for equipment performance, but many leases disclaim warranties, leaving the lessee with limited recourse if the equipment doesn't function as expected.

2. Inadequate Planning and Assessment:

• Choosing the Wrong Equipment: Leasing equipment that doesn't fit current or future needs (e.g., too low capacity, too many unused features, or quickly becoming obsolete) can lead to inefficiencies or the need for costly upgrades or early termination.

• Neglecting Long-Term Needs: Businesses often lease based on immediate requirements without anticipating growth, technological advancements, or changes in operations. This can result in equipment that is no longer suitable before the lease term ends.

• Poor Cash Flow Projections: Not thoroughly assessing the impact of lease payments, security deposits, and other fees on working capital can strain finances.

• Unprepared for Credit Approval: Failing to have necessary financial documentation or understanding their credit profile can lead to delays, unfavorable terms, or rejection.

• Ignoring Maintenance Responsibilities: Depending on the lease type, lessees may be responsible for maintenance and repairs. Neglecting these can lead to costly fixes or lease termination.

3. Focusing Solely on Monthly Payments:

• Not Comparing Total Costs: Lessees often focus only on the monthly lease payment, neglecting to factor in all additional fees, insurance, maintenance, and potential end-of-lease costs. This can lead to a deal that appears cheap upfront but is expensive overall.

• Overlooking Purchase Price Negotiation: Even with a lease, lessees can often negotiate the underlying purchase price of the equipment, which directly impacts the lease payments. Many fail to do this.

• Not Understanding How Deposits Affect Rates: While a deposit might reduce the perceived monthly payment, lessees need to understand if and how it impacts the overall interest rate and if it's applied towards payments or simply held as security.

4. Lack of Due Diligence with the Lessor:

• Choosing the Wrong Partner: Selecting a leasing company based solely on the lowest initial payment without vetting their industry experience, service capabilities, or reputation can lead to poor support or unfavorable terms down the line.

• Not Requesting Clarity: Failing to ask for clarification on ambiguous or confusing contract language can lead to misunderstandings and disputes.

• Not Documenting Verbal Agreements: Any verbal promises or understandings should always be put in writing within the lease agreement.

5. Issues at the End of the Lease Term:

• Forgetting to Act on Options: Lessees sometimes forget to exercise renewal or purchase options, leading to automatic renewals or missing out on favorable purchase prices.

• Underestimating Return Costs: As mentioned, the costs associated with returning equipment (dismantling, shipping, etc.) can be significant and unexpected.

• Not Clarifying Purchase Price/Formula: If a purchase option exists, failing to clarify the exact purchase price or the formula for determining it at the end of the lease can lead to disputes.

For knowledgeable and experienced legal representation when undertaking equipment-related transactions, contact corporate business lawyer Christopher Neufeld at Chris@NeufeldLegal.com or 403-400-4092 / 905-616-8864.

Key Aspects of a Commercial Equipment Lease A commercial equipment lease is a legally binding contract that allows a business (the Lessee) to use equipment owned by another party (the Lessor) for a specific period of time in exchange for regular lease payments (and other legal conditions set out in the lease agreement), thereby preserving the business' cash flow to advance the business enterprise. Read more.

 

Common Errors by Lessees with Equipment Lease Agreements Lessees often make several common errors when entering into equipment lease agreements, which can lead to unexpected costs, legal complications, and operational inefficiencies. As such, in advance of leasing equipment, it is important to understand some of the most frequent mistakes made by lessees when leasing commercial equipment. Read more.

 

Operating Lease vs. Finance Lease for Commercial Equipment The two principal forms of commercial equipment leases are operating leases and finance leases, with an operating lease being essentially a rental agreement, which provides the lessee with the right to use the specified equipment for a period of time, but the lessor retains the risks and rewards of ownership, while a finance lease is more akin to purchasing an asset with a loan, such that legal title often remains with the lessor during the lease term, while the lessee effectively assumes most of the risks and rewards of ownership. Read more.