A Brief Introduction About the Vehicle Lease Agreement
What Is a Vehicle Lease Agreement?
By leasing a vehicle, you can rent a car for a certain amount of time by paying the owner a monthly payment. Leasing a vehicle has its advantages over purchasing one brand new, especially if it’s being bought as part of a business:
- Leasing helps keep costs manageable, and it is often much cheaper to lease a car than to buy a brand new one.
- With a lower upfront cost, you can use your surplus liquid cash at your discretion.
A vehicle lease agreement must be drawn between the lessor and the lessee when a vehicle is being leased. The agreement contains details about the condition of the vehicle, the monthly cost of the lease, GAP coverage, and other important terms about the lease. It lays down all the important terms in one place, allowing the lessor and the lessee to understand them easily, thereby preventing miscommunication and disagreements. It may also be called a car lease agreement, or a commercial lease agreement.
Who Takes the Vehicle Lease Agreement? – People Involved
You would need to enter into a vehicle lease agreement if
- You are looking to lease a vehicle for either personal, business, or agricultural purposes.
- You are leasing your vehicle out to someone.
The contracting parties here are the lessor and the lessee.
Purpose of the Vehicle Lease Agreement – Why Do You Need It?
The purpose of this agreement is to:
- Lay down the terms and conditions of the lease and to ensure both parties acknowledge them.
- Lay down the relationship between the contracting parties as lessor and lessee.
- Mention the assessed value of the vehicle.
- Make provisions for the cost of repair in the case of excessive wear and tear and damage.
- Detail the terms of payment of the lease.
- Protect the interests of both contracting parties, making legal recourse an option in the event of a dispute.
Contents of the Vehicle Lease Agreement – Inclusions
The contents are –
- Period of Lease: This mentions the period of the lease and the dates on which it becomes valid and when it lapses.
- Parties to Contract: This clause identifies the recognized parties to the contract, that is, the lessor and lessee. It must mention their names and addresses.
- Information: This clause describes the vehicle and mentions its make, model, color, mileage, license plate number, and vehicle identification number (VIN).
- Condition of Vehicle: This clause details the make, model, and condition of the vehicle being leased. It may be of value to have an independent third-party assess the vehicle for any underlying damage.
- Valuation and Appraisal: This clause specifies the mutually agreeable value of the vehicle depending on its condition and other factors. It is essential to make provisions for an appraisal at the end of the term of the lease to determine if there has been any wear and tear that significantly devalues the vehicle.
- Purchase: This is an optional clause that is included in some arrangements wherein the lessee has the option to purchase the vehicle at the end of the term of the lease.
- Cost: This clause details the cost that the lessee will have to pay for the lease of the vehicle, including any initial costs like security deposits or capitalized cost reduction, maintenance costs, insurance, and overheads.
- Termination: This clause specifies the circumstances under which the agreement may be terminated.
- State-specific Laws: Mention any clauses and terms that may be required for compliance with state-specific laws and legislation.
How to Draft the Vehicle Lease Agreement?
The procedure to draft the agreement:
- Mention the period of the lease, including the dates on which the lease starts and ends.
- Identify the contracting parties with their respective names and addresses.
- Establish the lessor-lessee relationship between the parties.
- Specify the make, model, mileage, and other information about the vehicle, including the license plate number and Vehicle Identification Number (VIN).
- Mention the value of the vehicle, as was mutually agreed upon. Also, specify the retail value of the vehicle (MSRP), the negotiated price, residual value, and the interest that will be charged by the lessor. Consult local tax laws and include the sales or usage taxes applicable on the monthly payments.
- Tabulate the total cost of the lease.
- Decide the date on which the monthly payment is due and the late payment fee, if any.
- Provisions for termination of the contract must be made such that the circumstances under which the agreement may be terminated are clearly expressed.
The terms of the contract must be negotiated such that it is mutually beneficial and agreeable to both parties, in order to avoid dissatisfaction that could possibly lead to disputes. The interests of both parties must be kept in mind while framing the document and neither should be significantly disadvantaged or nourished at the expense of the other.
The lessee must be aware of any overheads that he is likely to incur and negotiate the costs of it with the lessor. Further, if the lessee intends on purchasing the vehicle at the end of the lease, he must ask the lessor to include a clause in the agreement that would allow him to do so.
However, some lease agreements may provide an option wherein the lessee is able to purchase the vehicle at the end of the term of the lease at a mutually agreeable price. Until the lessee goes through with such an arrangement and purchases the vehicle, the lessor remains the owner.
Benefits & Drawbacks of the Vehicle Lease Agreement
The Benefits of Having a Lease Agreement:
- Gives a clear overview of the terms and conditions involved, avoiding ambiguity and miscommunication.
- Safeguards interests of both parties.
- Makes legal recourse an option in the event of a dispute.
The Drawbacks of Having a Lease Agreement:
- The legal costs of the agreement must be borne by one or both of the parties.
- Negotiations can take time.
- Lessee may have to bear the costs of maintenance and servicing.
Things to Keep in Mind:
- The lessor must set defined limits on mileage so that the lessee does not overstep them, but in case he does, he will be met with a penalty. If the lessee feels that he is likely to overstep the limit, he must negotiate it with the lessor and often, it is more cost-effective to opt for an agreement with a higher mileage limit than to pay penalties.
- You cannot modify the vehicle without permission from the lessor.
- You cannot exceed the mileage that was agreed upon. If you exceed this limit, you’ll have to pay a penalty for the extra miles driven. It is often cheaper to negotiate a higher mileage agreement than to pay penalties.
- The vehicle must be returned at the end of the lease in good condition.
- The lessee will have to bear the costs of any damage other than wear and tear from normal use of the vehicle.
- You cannot take the vehicle abroad without written permission from the lessor who might charge you for each time you do this.
What Happens in Case of Violation?
In case the terms of the contract are breached by either party, the aggrieved party can resort to the legal resolution of the dispute, either by arbitration or conventional dispute resolution methods(1). Depending on how the agreement suggests disputes should be handled, the parties might be required to amicably settle the dispute internally or by alternative dispute resolution methods before going to court.
The fundamental difference between leasing and purchasing a vehicle lies in the ownership of the vehicle. When purchased, a vehicle becomes the property of the person purchasing it. However, when a vehicle is leased, the company or individual who is leasing it out (the lessor) remains the owner and the individual or company taking the lease ( the lessee) gets possession and rights to use the vehicle but does not own the vehicle.
A vehicle lease agreement is required if you are leasing a vehicle for personal, business or even agricultural purposes. It details the value of the vehicle, the total cost of the lease including any down payments, trade-ins, overheads, and insurance premiums.
Having such an agreement protects both the lessor and the lessee, in case any dispute arises. It also helps to have all the terms of the lease presented in a single document so there is little room for miscommunication.
When leasing a vehicle, it is in the best interest of both parties to go over the terms as per the agreement and negotiate any terms that they might not be comfortable with. The lessee should keep the mileage limit in mind and try to negotiate a higher limit if he feels he is likely to exceed the limit.