Act With Care When You Lease Equipment

By Martin Paskind

Some business people look over contracts carefully. They study words, punctuation marks, sentences and paragraphs. They devote major brainpower to the project.

Then they send the whole thing off to lawyers, who repeat the process. This combination of care and caution takes place in only about one in 25,000 deals.

Managers tend to turn off their brains when facing preprinted forms. Most agreements are on forms, so little thinking happens and big problems occur. Nowhere is this more true than in equipment leasing.

Remember, however, it's up front when the other guy wants your business that you can deal. So here, for ordinary managers, are a few things to know and understand about equipment leasing.

First, check with leasing companies of different kinds -- banks, brokers, leasing specialists, captives of manufacturers and independents. Negotiate with several. Then pick the one with which you want to work.

Don't pick a lessor first. Make them compete. Once a vendor has your account, there's not much motive to negotiate.

Knowing What You're Doing

Second, expand your knowledge. Know your lessor. Will upgrades and additional needs be provided? Will the lessor help with regulatory changes? What about flexibility at the end of the lease?

Know your equipment. Will it become obsolete during the lease term? Will you need more of it? Less?

Most equipment leases start with acceptance or commencement. On that date, you inspect the stuff and pronounce it fit for service. Then it's yours, even though the equipment is in a lessor's warehouse or in a boxcar. Your lease shouldn't begin until you're using the equipment successfully.

Success is important. All equipment leases include a non-negotiable "hell-or-high-water" clause that makes you pay regardless of whether equipment works. Unless you love paying for equipment that just sits there, be certain it operates when you accept it.

If things are complicated put an engineer or other expert on it. Remember, once you accept, you pay every month, period.

Floating

Most lessors buy equipment from manufacturers or wholesalers before they deliver it to you. Then they take your money and, perhaps a month or two later, pay on account to the manufacturer or wholesaler.

For 30 or 60 days, your lessor is free to earn interest on your cash. You can try to negotiate this if you pay attention.

Equipment leases can be short- or long-term. They cover goods ranging from heavy construction equipment to telephone systems and copying machines. Some questions, however, relate to leases of many different kinds of equipment.

Lessees need to know, for example, whether they can move equipment to a new location without written consent for which they may have to pay. Computers and other technology products need upgrades every other week. You need strong lease language if you want the lessor to pay for upgrades, adding costs to lease payments.

Much the same holds true for alterations and modifications, which leasing companies usually accept when they're easy to remove. Additions and alterations, however, may be taxable income to the lessor. More problems.

OutFrom Down Under

Early termination probably is the most common equipment-leasing problem because you can't sell goods under a lease. You're a lessee, not an owner.

Often, the termination price is the total of all payments remaining. Other approaches involve preserving the lessor's originally-anticipated yield. If you haven't done so already, this is a good time to call your accountant to help you make the best possible deal and, hopefully, to understand it.

Provisions for early termination, early buyout, subleasing and assignment protect lessees. They are not, however, going to be in that printed-form contract, and they're not going to be in the deal at all unless you put them there.

Other provisions protect you when the lease ends. De-installation date is a key provision. Do you dismantle equipment, crate it and ship in on your time or the lessor's?

Don't take anything for granted. Most form leases require shipment to anywhere in the United States. Maybe you can cap that, or limit it to a specific distance such as 100 miles. If you want to keep items, can you do so and still send back part of the equipment?

Most leases state a "fair market value" at which you'll return goods to the lessor. You need to understand how that's calculated and what charges it includes. Again, this may be a good time to talk with your accountant.

You can't negotiate any of these points after you've signed the deal. Nor can you negotiate if you allow a printed form to turn off your mind. Always think, and be careful and cautious.

For more information, check Marks and Johnson's "Look Before You Lease," 9:2 Business Law Today 26 (Nov.-Dec. 1999).

About The Author

Martin Paskind is an Albuquerque lawyer. His practice emphasizes legal services to small businesses. Questions or comments can be mailed to him in care of the Albuquerque Journal, P.O. Drawer J, Albuquerque, N.M. 87103. This column is not intended to provide legal advice to any specific person, or with respect to any particular problems or situations.

For advice on specific problems and circumstances, contact your attorney.