A well drafted equipment lease agreement can save time and money for any small business. Familiarizing yourself with the key terms of the lease agreement and what they mean can help you know if you are getting a good deal or not. This post will provide a basic overview of the essential items to cover in any lease agreement that your lawyer drafts for your small business.
What Are the Key Provisions of Any Equipment Lease Agreement?
Small business owners act as a “lessee” when seeking to pay for the right to use equipment either owned or financed by a lessor. “Schedules” spell out the different timeframes and terms that apply for a lessee using equipment under a lease. All leases should generally include the following terms:
- Equipment description – a detailed enough account that includes an manufacturer information, year, serial numbers and other information specific to the equipment being leased.
- Maintenance provision – providing terms for who must maintain the equipment, the extent of repair and update required.
- Procurement – identifies the party responsible for selecting the equipment if it will be acquired from someone other than the lessor directly, as well as who will pay for delivery and installation.
- Schedule and Renewal – exact dates for the term of the lease including at what date the lessee must indicate their wish to exercise a renewal right.
- Termination – procedure and consequence for termination by either party.
- Restrictions – terms that restrict the lessee’s use of the equipment and business conduct, including prohibitions against sale, subleasing or use of the equipment as collateral (this protects a lessor’s ownership rights in the equipment against 3rd party claims as well).
- Representations and Warranties – relieve the lessor or lessee of obligations in regard to the equipment that fall outside the scope of the written agreement.
- Insurance, taxes and fees – provides for who will assume the risk of loss due to damage, theft or fire, and who will pay taxes and other fees on the equipment.
- Return of equipment; end of lease – what happens once the lease schedule completes and what are the responsibilities for the lessor and lessee regarding return of equipment.
Purchase options – a key provision to consider when drafting the lease agreement that determines whether the lessee will have the right to purchase the equipment at any point during the lease schedule (see below).
Purchase Options: Strategic Leasing for Long-Term Success
Small business owners should know that leasing can be a strategic step in eventually purchasing key equipment for the business. Often small business owners lease a piece of equipment that turns out to be essential to their business. A well drafted lease agreement anticipates the possible long-term need for such equipment, and should include a purchase option.
Purchase options take a portion of your lease payment and credit it to the purchase price, lowering the overall cost of the purchase should you decide to exercise the option at a later date. When crafting such an option, you should consult with a qualified lawyer who can help you craft a deal that works in your favor. Rob Cohen Law has years of experience drafting successful lease agreements for small businesses. Call for a free consultation today.