There are a myriad of potential terms to consider when creating an equipment lease. Deciding which terms to leave in and which to take out can feel like gambling to equipment owners, so some leases end up unnecessarily long and redundant.
The two primary purposes of a lease agreement are to (1) ensure the lessee is legally obligated to pay, and (2) to limit the lessor’s liability. Those purposes can be accomplished by making sure the lease contains a few basic terms. While every transaction is unique and every party to a contract has his or her preferences and opinions, the following items make up the backbone of most leases.
1. Acceptance. Acceptance means the lessee (the renter) confirms receipt of the property that is the subject of the lease. Signing the acceptance provision obligates the lessee to perform his duty under the lease, e.g. make lease payments. A comprehensive acceptance provision will include a clause that says once acceptance occurs, the lessee cannot cancel the lease due to non-delivery, and the lessee’s responsibility to pay is unconditional and may not be reduced, abated or offset.
2. Disclaimer of Warranties and Limitation of Liability. These clauses allow the lessor (the property owner) to disclaim all expenses and implied warranties. Also, the lease should include a disclaimer concerning the lessor’s liability for damages occurring related to the lease or the equipment. These clauses are sometimes combined.
3. Indemnity clause. This clause indemnifies the lessor for damages that may arise out of the operation and maintenance of the equipment by the lessee.
4. Risk of Loss. A risk of loss clause shifts the burden to the lessee to bear full responsibility for the damage, loss, destruction, or theft of the leased property, usually equipment. The lessee may be required to repair the equipment if possible, or if not repairable, to replace or pay the value of the equipment plus the balance of the lease.
5. Default and Remedies. A comprehensive lease agreement should include precise language to set forth circumstances that amount to default, along with collection strategies for the equipment and the unpaid rent.
For an equipment owner, these are some of the most important items you should include in your equipment lease. In our next article, we will discuss other important terms to consider adding to your lease.
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