SERVICES & MAINTENANCE in Equipment Lease Agreements

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Services and maintenance responsibilities in an equipment lease agreement are a crucial part of the contract and need to be clearly defined to prevent disputes between the lessor (the equipment owner) and the lessee (the user). Generally, the distribution of maintenance responsibilities depends heavily on the type of lease and the negotiated terms, with services being more aligned to the specifications of the equipment and its particular demand, with certain equipment having considerable service demands, which can make the provision of those services by the lessor time-consuming and profitable.

A. Routine Maintenance and Minor Repairs (Typically Lessee)

The lessee is most often responsible for the day-to-day care of the equipment to keep it in good working order. This usually includes:

• Routine Upkeep: Tasks like checking fluid levels, ensuring proper tire pressure, cleaning, and performing daily operational inspections.

• Minor Repairs: Replacing small, worn-out parts like filters, belts, and hoses.

• Following Manufacturer Guidelines: Adhering to the maintenance schedules and requirements outlined in the equipment's operational manuals.

• Repairing Damage from Misuse or Negligence: The lessee is almost always liable for repair costs if the damage is a result of their misuse, accident, or neglect, rather than normal wear and tear.

B. Major Repairs and Wear-and-Tear (Varies by Lease Type)

Responsibility for major mechanical failures or those resulting from normal wear and tear often depends on whether the agreement is an Operating Lease or a Finance/Capital Lease.

• Operating Lease: With an operating lease, the lessor typically retains responsibility for wear-and-tear, which can include major mechanical repairs that emanate from such wear-and-tear and prior use (as opposed to its improper use or other damage). The lessor retains the risks and rewards of ownership. Short-term; the lessee returns the equipment at the end of the term; lease payments are often treated as an operating expense.

• Finance/Capital Lease: With a finance/capital lease, the lessee typically assumes responsibility for wear-and-tear, together with major mechanical failures. The lessee assumes most of the risks and rewards of ownership. Long-term; often includes a purchase option for the lessee at the end of the term; treated more like an equipment purchase for accounting purposes.

C. Services (Varies by Equipment and Capacity to Deliver)

The availability and provision of services tends to be aligned with the specifications of the equipment and its particular demand, with certain equipment having considerable service demands, which can make the provision of those services by the lessor time-consuming and profitable.

D. Importance of Insurance in Equipment Leasing Arrangements

Insurance is of critical importance in equipment leasing arrangements, as it serves as both a financial safeguard and mitigates risks for both the lessor and the lessee. As such, it is important that both parties to the lease have appropriate insurance in place, with the lessor contractually mandating the attainment of the appropriate insurance and providing proof of coverage when sought by the lessor.

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.