KEY ASPECTS OF A COMMERCIAL EQUIPMENT LEASE

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

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.

I. Parties Involved and Equipment Description:

• Lessor: The owner of the equipment (e.g., a financial institution, leasing company, or vendor).

• Lessee: The business or individual who will be using the equipment. Full legal names, addresses, and contact information for both parties are essential.

• Detailed Equipment Description: A precise description of the leased equipment, including:

  • Make, model, and serial numbers.

  • Any accessories, attachments, or identifying features.

  • The condition of the equipment at the time of delivery (often with a "Certificate of Acceptance" signed by the lessee upon receipt).

II. Lease Term and Financials:

• Lease Term/Duration: The fixed period for which the equipment will be leased, with clear start and end dates. This can range from a few months to several years.

• Lease Payments:

  • Amount: The exact periodic payment amount (e.g., monthly, quarterly).

  • Due Dates: When payments are due (e.g., 1st of each month).

  • Payment Method: How payments are to be made.

  • Late Fees/Penalties: Consequences for late or missed payments.

  • Interim Rent: A one-time daily charge for the period between delivery and the first invoice date.

• Security Deposit: An upfront payment to cover potential damages or default, with clear conditions for its return or forfeiture.

• Purchase Option (if applicable): What happens at the end of the lease:

  • Fair Market Value (FMV) Option: Lessee can purchase the equipment at its fair market value.

  • Fixed Purchase Option: Lessee can purchase the equipment for a predetermined amount (e.g., $1 buy-out).

  • Bargain Purchase Option: Purchase at a price substantially lower than the expected FMV.

• Renewal Option: Terms under which the lessee can extend the lease, including any new rental rates.

• Stipulated Loss Value: A schedule outlining the value of the equipment at different points during the lease, establishing the lessee's liability if the equipment is lost, damaged, or becomes unusable.

III. Responsibilities and Liabilities:

• Maintenance and Repairs: Clearly define who is responsible for routine maintenance, minor repairs, and major repairs. Often, the lessee is responsible for keeping the equipment in good working order.

• Insurance: Specify the types and minimum levels of insurance coverage the lessee must maintain (e.g., liability insurance, coverage for the full replacement value of the equipment). The lessor is often named as a loss payee.

• Risk of Loss/Damage: Clarify who bears the risk of loss, theft, or damage to the equipment during the lease term. Typically, this falls on the lessee once the equipment is in their possession.

• Permitted Use: Any restrictions on how the equipment can be used to protect the lessor's investment. This might include limitations on location, purpose, or who can operate it.

• Taxes: Clarify who is responsible for paying applicable sales, property, or other taxes related to the equipment or the lease transaction.

• Indemnification: Clauses where the lessee agrees to hold the lessor harmless from third-party claims or damages arising from the use of the equipment.

• Default Provisions: Outline what constitutes a default (e.g., non-payment, misuse of equipment) and the remedies available to the lessor (e.g., repossession, accelerated payments, legal action).

• Return of Equipment: Detailed instructions on how and where the equipment must be returned at the end of the lease, and in what condition. This includes any associated costs for cleaning, repairs, or transport.

IV. Other Important Clauses:

• Governing Law: The state or provincial law that will govern the agreement.

• Assignment: Whether the lessee can assign their rights or obligations under the lease to another party.

• Warranties: Disclaimers regarding warranties (the lessor typically does not provide warranties, as they are not the manufacturer).

• Entire Agreement: A clause stating that the written lease constitutes the entire agreement between the parties, superseding any prior discussions or understandings.

• Signatures: Authorized signatures of both the lessor and lessee, along with dates.

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.