Common Capital Equipment & Asset Leasing Terms

Asset leasing is a widely used vehicle for businesses to acquire the goods they need to grow. An asset lease agreement is a contractual arrangement between two entities – in our case that would be two commercial businesses. The user of the equipment is referred to as the Lessee, the funder is referred to as the Lessor. The lessor agrees to allow its customer (the lessee) to use an agreed asset for a defined period of time in exchange for regular payments. The payments are normally for a fixed period at an agreed fixed price. The availability of asset finance into the commercial world can be a simpler and easier process than conventional bank loans available from traditional high street lenders. This type of agreement can be used for various assets, such as office equipment, Business furniture, Telecoms, IT infrastructure, vehicles, Plant & Machinery, or other ‘hard assets. In certain circumstances a restricted amount of software and installation costs can be blended into a contract to provide a simple fixed term solution to a company’s requirements.

Leasing assets can often provide the flexibility for businesses that need access to equipment without the requirement of finding the capital associated with purchasing. However it is important for both parties to carefully review and understand the terms of the lease agreement before entering into such a contract. It’s also important to ensure that the agreement aligns with the interests and needs of both the lessor and lessee.

Key Phrases to understand when using an asset finance lease agreement.

Maintenance and Servicing support
It is important to acknowledge which party (lessor or lessee) is responsible for maintaining and repairing the leased asset. This can vary based on the type of lease agreement. In most cases, a separate 3rd party agent will be responsible for maintaining the asset on a separate support contract. This can become confusing as it is fairly common for a leasing company to be elected to collect a support contract in addition to the fixed lease payments as an agent and pay the service provider directly. It is important for customers to know exactly what element of the payment is capital repayment cost and which element is the support contract. If this type of lease agreement is chosen it is also important to note that the lessor is merely an agent in collecting these fees and is not responsible for providing the actual support. A leasing company would only do this to ensure the equipment (and therefore its assets) are being looked after to an acceptable standard over the period of hire.

Lease payments
The parties agree on a specific number of payments called a schedule that the lessee is obligated to make to the lessor. Payments may be monthly, quarterly, or annually.
Any future variation to the agreed schedule may result in an administration fee being applied. The leasing company operates on a model of having guaranteed income being received every month to fund new contracts so its important payments are made on time each period.

Lease Term
The specific duration for which the lessee is granted the right to use the asset. This may be a fixed period. The term can be variable starting at 2 years to 7 years typically. Term options are normally directly linked to the usable life of the asset. At the end of the lease, or if a lease is settled early, the asset must be returned to the Leasing company.

Terms and conditions of hire
These are the specific rules and regulations governing the use of the leased asset. This may include restrictions on modifications, maintenance responsibilities and return of goods.

Governing Law
An important factor is governing law. In the UK there are many variances in law across the Union countries. It is important to understand and acknowledge which jurisdiction is elected to be the governing Law. Normally stated as the legal system administered through the courts of England and Wales.

Insurance
Insurance is an important element of the lease transaction as the lessor’s interest needs to be recognised as the owner of the goods. In most cases the agreement specifies that the lessee is required to maintain insurance coverage on the leased asset and the types of coverage required. If this is not available, the lessee will apply an insurance policy to the agreement to protect its interests in the asset.

Termination conditions
Describes the conditions under which either party can terminate the lease agreement before the agreed-upon term. It’s vital that the Lessor keeps to the terms of the agreements to avoid penalties. Due to the nature of the transaction with the leasing company paying in advance and buying the goods they have to ensure the corresponding customer payments are made in a timely manner.

Defaults & remedies
Once signed the lease agreement is not cancellable. These clauses Outline the consequences in case of default by either party, including late payment fees, termination rights, and potential legal actions. Default remedies can be costly so it’s important the lessee chooses the assets wisely and engages with a qualified supplier as the leasing company has no responsibility towards asset performance.

Return Of products
It’s important to also note that as a lessee does not own the product it is requirement to ensure the goods are returned at the end of the agreement in an average working condition. Subject to average wear and tear based on age. It is recommended you seek advice at the end of the lease of the best way of completing this requirement to avoid any breached in the terms and conditions. This can normally be carried out to a satisfactory standard through approved suppliers.

Electronic signatures
It has become a standard option for customers and suppliers to request agreements are now signed electronically. This can be performed via several signature software platforms. These platforms offer digital certified transactions that allow a contract to be entered into at arms length. There are rules and protocols that need to be followed to ensure that the signatory has executed the agreement in the correct manner and a certificate is produced for all parties to agree. The rules governing electronic signatures are defined within the Electronic Communications Act 2000. This process has now reached a mature phase and is now common place in the market.