Brief About an Equipment Rental Agreement
In an equipment rental contract, the owner of the equipment, otherwise called as lessor, lets a person use the equipment for a given period. The lessor is compensated in return with a monetary consideration. An equipment lease agreement shall be short term and long term. In the case of short-term contracts, the lessor provides the option to renew the term as and when required by the lessee. But in most of the cases, the lessors prefer a long-term contract as it is favorable to the lessor and lessee in terms of money and usage.
Capital lease and operating lease are the two types of leases. A capital lease is perpetual and non-cancellable. The companies/persons are entering into such an agreement normally buys the equipment at the end of the lease period. When a company requires equipment for a shorter period, they enter into an operating lease agreement. The type of lease shall be considered before prepare an equipment rental agreement template.
Who Takes the Equipment Rental Agreement – People Involved
- Lessor – He is the rightful owner of the equipment. He passes on the possession of the equipment to another person for a consideration payable every month.
- Lessee – Makes the equipment on lease from the lessor for a specified period.
- A lessor and lessee can be an individual or a company or any business organization.
Contents of the Equipment Rental Agreement
- Name and address of the lessor and the lessee agreeing.
- The term of the lease. The clause shall clearly state that the equipment must be returned once the lease period is over.
- The details of the equipment that is subject to lease/rental must be explained in detail. It shall have the necessary information about the appearance, weight, components, spares provided as part of the equipment, working condition of the equipment, etc.
- The payment terms stating the amount of rent and other charges to be paid in case of damages to the equipment. It shall also include the service charges to be paid by the lessee in case the equipment is not returned on time.
- Security deposit – The lessee shall provide a certain amount as a security deposit to the lessor before receiving the equipment. The clause shall provide the deposit as refundable to the lessee once the lease period is over. Also, any charges on account of damages shall be reduced from the deposit before it is refunded to the lessee. The security deposit shall also bear a certain percentage of interest from the date of payment by a lessee to the date of refund.
- The location of the equipment shall be the lessee’s place and can be removed only from the consent of the lessor.
- The insurance, taxes, and fees shall be paid by lessor/lessee as mutually agreed and shall be clearly stated in the agreement.
- The responsibility of maintenance and repair shall rest with the lessee. He should return the equipment after the lease period in an operating condition allowing for reasonable wear and tear.
How to Draft the Equipment Rental Agreement – Points to Consider
- What is the nature of the equipment that is proposed to be leased? The specifications of the equipment shall be explained in detail and clear manner.
- The term of the agreement shall be for a minimum period of one year. Month to month rental agreement doesn’t benefit both the lessor and the lessee.
- The ownership of the equipment lies only with lessor at all times. The lessee shall only use them for the intended usage and shall not sublease, sell at any cost.
- The cost of the rent shall be fixed by the lessor after considering the remaining useful life of the equipment, the extent of usage by the lessee. The rent shall represent the benefit that accrues to the lessee out of its utility.
- The limitations of usage need to be set. “Normal wear and tear” are well explained.
- The responsibility of payment of insurance, taxes for the equipment shall be fixed.
- Additional warranties and safety assurances proposed by the law shall also be considered and explained.
- Indemnification of the lessor in case of gross negligence by the lessee in handling the equipment.
- The termination of the lease can only be done after issuing equipment rental termination notice by the party who intends to terminate.
Purpose of the Equipment Rental Contract – Why Do You Need It
A business may not be able to fund the purchase of high-value equipment right away. Hence, they wish to take the special equipment on lease rental and utilize it for a specified period. The parties intending to enter into such a relationship prepare equipment rental agreement detailing all the terms and conditions, duration of usage, and manner of payment of rent. It is essential to enter into a written agreement by affixing the signature of parties to the agreement. The lessor and lessee must have the signed initially copies of the agreement.
This is required to avoid any disputes in the future arising on account of misuse of equipment or violation of any other terms of the agreement. The agreement must also be registered with the Equipment Leasing Registration Authority within two weeks of commencement of a lease by the lessor. Most of the equipment leasing contracts are expensive.
The lessor and the lessee do sufficient market research about the equipment before entering into the contract. This provides a bird’s eye view of the usability and salability of the equipment. An equipment rental agreement is entered to provide volatility of funds to the lessor and lessee, which they would not have, by acquiring the equipment or by keeping it idle.
Negotiation can happen with the cost of the equipment in a lease contract. The lessee shall consider negotiating the cost of rent by parting a specified percentage of revenue derived out of the usage of equipment with the lessor. The regular monthly payment of rent shall be compensated, as mentioned above.
Benefits & Drawbacks of the Equipment Rental Agreement
The following are the benefits of entering into an equipment rental agreement.
- A formal agreement always resolves confusion and disputes that may arise in the future.
- The working capital of lessor and lessee are well funded. The lessee is relieved from the burden of funding or borrowing to purchase costly equipment. The lessor can utilize the idle capacity of the equipment and get a constant inflow of funds for his business. The business can save a lot of money by entering into an equipment rental contract.
- A leasing agreement offers various tax benefits to the lessor and the lessee.
- The lessor and the lessee are saved from the risk of obsolescence of equipment. The lease period is for a specified time. Hence, they can prepare themselves for any up-gradation of the equipment and take important decisions of discarding, selling or upgrading the equipment as and when the need arises.
- The drawbacks of getting into an equipment rental contract are
- The usage of equipment is limited. The lessee is bound to use the equipment only for the purpose mentioned in the agreement, whereas, it may offer extended benefits if used for additional purposes.
- The rent paid by the lessee throughout the contract may not match the market value of the equipment.
- The lessor is always under the threat of misuse or damages to the equipment, though he is sufficiently indemnified by the contract.
- Obsolescence is a major drawback in financial lease contracts.
What Happens in Case of Violation of Equipment Rental Agreement?
The burden of violation of equipment rental agreement mostly lies with the lessee. When there is significant damage to the equipment on account of negligence on the part of the lessee, or any of the employees of the lessee can cost too much for the business. The lessee shall be required to compensate the lessor by paying charges for damages caused. Also, the lessee shall be forced to return the equipment even before the termination of the lease period.
This can have a severe impact on the normal operations of the business of the lessee, where the equipment forms part of the primary production line. The lessor is also pushed down with the difficulty of replacing the equipment. In some instances, the lessor may wish to press the legal button as the cost of the equipment is significantly high, the damages paid as part of the agreement is not sufficient to cover the loss.
Also, when the lessee sub-lets, pledges the equipment without the knowledge of the lessor, he has violated the clause of equipment rental contract. The lessor shall request the immediate return of equipment in all cases of violation. But violation is the last thing any lessee would expect as it will cost too much of his resources and peace of mind.
An equipment rental agreement formalizes the relationship and intention of lessor and lessee to utilize the equipment for a reasonable consideration and for a certain amount of time. It offers protection to the lessor and relieves him from the worry of improper usage of equipment. The lessee is given a scope of usage in the agreement, which acts as a regulating factor not only to the lessee but also to the other users of the equipment in his business.
The financial and operational benefits of an equipment lease are given a formal structure in the agreement. The lessor can enter into short term lease agreements with multiple lessees as and when a lease period is over since the equipment rental agreement template will come handy to him any time. A finance lease agreement is an ownership agreement in disguise as it is perpetual, and the lessee is free to plan for the growth of his business without worrying about investing in equipment in the near future.