Equipment leases require the customer to notify the leasing company when certain events occur during the life of the lease. Miss any notices and you’ll pay the piper.
The top four events are:
1. Equipment relocation
2. Equipment damage
3. Corporate ownership or structure change
4. End of lease
Equipment relocation: You must notify the leasing company within a specific number of days if you are relocating equipment. The most common is a 30-day written notice before moving equipment. That can be any move, whether it’s to a new building or across the hall.
TIP: Why do they care? They need to keep track of the equipment for proper invoicing of sales/use tax and property tax and to be able to find their equipment. Some leasing companies charge fees to cover the “cost” to redocument the new location. The fee is negotiable and sometimes may be eliminated completely.
Equipment damage: You must notify the leasing company in writing if the equipment is damaged or destroyed. Most leases require written notice within 10 to 30 days after the damage occurs.
TIP: They may ask you to pay off the remaining lease balance on the destroyed asset. The payoff will include the remaining payments, late fees, if applicable, plus the equipment’s fair market value. If you choose the payoff option, negotiate the amount because the company is getting its money earlier than expected.
Another available option may be to replace the asset with an identical piece of equipment. The replacement must be free and clear of liens. If the replacement option is selected, payments continue as in the original lease.
Ownership or corporate structure change: You must notify the leasing company, usually within 30 days, if your company ownership or corporate structure is changing. In short, you need the blessing of the leasing company to change owners, partners, corporate structure or company name.
TIP: Don’t wait until the last 30 days before telling the leasing company about the changes.
1. If your company is going to have new owners, the leasing company will need to approve the new entity’s credit as if the lease is new and the business is a start-up. Leasing companies seldom finance new ventures. There are exceptions.
2. It is helpful if the new owners currently operate an identical business and the transaction will be rolled into their existing organization. The leasing company views this as a lease assumption. Full credit and financial information will be required.
3. Be prepared with an alternate plan if the approval takes an unexpected length of time.
TIP: If the leasing company does not approve the new owners, the lease language requires immediate payoff and full penalties will apply. If this happens, negotiate the payoff amounts and terms.
End of the lease: You usually have three options:
1. Purchase all equipment.
2. Renew the lease on all equipment.
3. Return all equipment.
The standard notification period is usually 60 days prior to the end of the original lease term. That means you must send a written notice to the leasing company to tell them what you would like to do with their equipment.
Some really tricky leasing companies make it almost impossible to figure out when the notice is due. The lease says the notice is due no less than 180 days and no more than 210 days before the end of the lease. STOP! Calculate this? You have only a 30-day window during a five-year lease to remember to give the notice.
If written notice is not provided within the required time frame, the lease may automatically renew for a period between 12 additional payments and as long as another full lease term. Miss the notice on a five-year lease and face another five-year lease.
TIP: Become familiar with all notification requirements. The definitions are specific to each lease contract and differ with each leasing company. Never assume all leasing companies use the 60-day notice.
TIP: Establish a calendar to track end of lease notification dates. The leasing company will not send a reminder warning. There are web-based end-of-lease notification services to help you remember when notices are due. Some send the notices for you.
TIP: Use certified mail for every required notice. Faxes and email are never sufficient. No proof there. Keep all delivery receipts. A paper trail is essential.
