A Brief Introduction About the Equipment Lease Agreement
An equipment lease agreement is a special type of contractual agreement in which the lessor (the owner of the agreement), can allow the lessee (the one availing the agreement) to make use of the available equipment for a specific period in exchange for some period payments. Once both the lessor and the lessee accept the key terms of the equipment lease agreement, the lessee is given the right to make use of the equipment on lease. In turn, the lessee is supposed to make periodic payments during the lease duration. However, the lessor (owner of the equipment) would retain the equipment’s ownership.
Who Takes the Equipment Lease Agreement?
An equipment lease or equipment rental contract –also referred to as the rental of goods equipment, is a specialized type of contract with specific conditions in which one party (known as the lessor) rents equipment to another party (known as the lessee). The parties should also analyze the specific types of equipment lease agreements available out there.
Purpose of the Equipment Lease Agreement
A company or a business organization needs to specify the purpose of an equipment lease agreement for availing its benefits. The main purpose of a simple equipment lease agreement for a business organization might include:
- Leading to tax advantages.
- Results in cost-saving by buying an entirely new set of equipment.
- Helps in providing lower monthly payments for the necessary equipment.
- Improves the overall flow of working capital.
- Provides access to the latest trends as well as technologies at affordable prices.
The agreement also serves as an important record of the transaction and a legal transaction when the agreement is breached or broken.
Contents of the Equipment Lease Agreement
A typical equipment rental agreement is known to comprise specific terms or contents that form the basis of the given contract. Some of the important components include:
- Duration of the Lease: The lease duration would depend on the specific needs of the company along with the overall costs of equipment.
- Financial Terms: The agreement includes some of the associated financial terms like payment timeline with respect to when the periodic payments tend to be due and the previous due for the last payments.
- Lessor’s Payment Due: The payments for the rental agreement are widespread across several months until the lease period’s expiry or when the lessor would take the equipment’s own if there is an existing agreement with the lessor.
- Equipment’s Market Value: As some equipment tends to be quite expensive, it is imperative for the lessee to analyze the equipment’s existing market value before signing the contract.
- Tax Responsibility: Depending on the type of the lease agreement, the lessee is required to pay certain costs in the form of taxes on the given equipment.
- Provisions for Cancelation: The agreement should contain the guidelines with respect to the agreement cancellation.
- Renewal Options for the Lessee: It should provide the necessary guidelines on the renewal process upon the expiry of the lease period.
How to Draft the Equipment Lease Agreement?
In the case of this agreement, it is important to have the lessee(s) sign the lease agreement form. An equipment lease agreement template can be drafted and utilized multiple times. If you are an equipment owner or the lessor, you are also required for drafting equipment lease agreement in a manner such that you remain legally protected in case the equipment gets damaged or someone gets injured while using the equipment.
Here are some steps to follow:
- Format the draft depending on the specific clauses of the agreement.
- Identify the involved parties along with the starting date for the agreement.
- Include the recitals specifying the summary of why you have entered the agreement in the first place.
- Give the lessee an explicit grant of the lease.
- Specify the duration of the lease.
- Explain the specific amounts for the lease payments.
- Specify the conditions for a security deposit of the lease amount.
- Put limits on the overall utilization of the equipment.
- Include a provision that requires the lessee to surrender the equipment.
- Make it clear that you are the owner.
A lessor relying on the end-of-term residual value of the agreement would often come across negotiations with respect to the condition of the equipment, the price of purchase options, and the place of return –to be stated as the difference between profit and loss.
Benefits and Drawbacks of the Equipment Lease Agreement
Some of the potential benefits of leasing or renting equipment include:
- The lessee is not required to pay the full cost of the asset upfront –no utilization of cash or the need to borrow money.
- Getting access to high-grade commercial equipment.
- The lessee is expected to pay for the asset over a specified period of time that helps in building the budget over time.
Some of the expected drawbacks of the agreement might be:
- The lessor is not expected to claim capital allowances if the lease period tends to be less than five years.
- Leasing agreements might appear complex to the first-time lessees out there.
What Happens in Case of Violation?
In case of violation of the equipment lease agreement, the lessor or owner of the equipment can take relevant legal actions as stated below:
- Sending a notice letter to the lessee specifying proof of the agreement violation.
- Checking the Alternative Dispute Resolution (ADR) clause of the agreement.
- Filing a lawsuit by hiring an attorney and choosing the right court.
Equipment lease agreement is regarded as an essential document that is known to clearly state the terms of the given lease, parties involved in the agreement, rights as well as obligations of the parties, ownership of the leased equipment, liability for damages or losses, guarantee and warranty clause, responsibility of the maintenance costs and paying taxes, and so much more.
[Also Read: Master Equipment Lease]
Sample Equipment Lease Agreement
A sample of the agreement can be downloaded from below.