An Equipment Rental Lease Agreement is a contractual agreement between a lessor and a lessee to lease and use the equipment for a specific period in exchange for periodic payments.
The lease subject may be factory machines, vehicles, or other equipment. Once the lessor and the lessee agree to the terms and conditions of the Lease, the Lessee is afforded the right to use the equipment and, in return, makes periodic payments during the duration of the lease. Nevertheless, the Lessor still retains ownership of the leased equipment and has the right to terminate the equipment lease agreement if the lessee breaches the terms of the Agreement or engages in illegal activity using the equipment.
In the case of a temporary equipment rental lease agreement, the lessor may provide the lessee with an option to either renew, terminate, or purchase the rented equipment. This, however, depends upon the terms and conditions of the initial agreement made and agreed upon by both parties.
Why do Companies Enter into an Equipment Rental Lease Agreement?
At any one point, a company will have to acquire equipment for their business, and there are three ways to do this. First, the company can buy the equipment it needs in cash. Second, the company may take out a loan from a bank to buy the equipment it needs.
Third, the company may enter into an equipment lease agreement to rent the equipment it needs for a lower price. Renting equipment is an excellent way for companies to make the upgrades they need without spending too much money.
Why choose to lease over buying?
- Leasing saves much money for the company
- It can lead to tax benefits
- Leasing improves the working capital flow
- Leasing also improves the working capital flow
- Leasing allows the company to get the latest technologies at a more affordable cost
Types of Equipment Rental Lease Agreement
Most companies worldwide agree to an equipment rental lease agreement so that they can lease equipment instead of purchasing it. As a result, several companies lease equipment to the companies which need them in exchange for periodic payments.
Often, companies do not have enough capital to buy large, complex machines or equipment, which may cost millions or billions of dollars. For this reason, such companies opt to rent the necessary equipment for as long as they need it. Some leased equipment includes telecommunication gadgets, diagnostic tools, computers, and more.
A capital lease is a form of lease that is non-cancellable and long-term. Companies opt for a capital rental lease agreement to utilize a piece of equipment for a long duration or when they want to purchase the said equipment at the end of the lease period.
The lessee records any assets and liabilities of the equipment in its balance sheet during the lease period. Most companies opt for this type of lease, especially when they need to rent costly equipment, which they may have the budget to purchase immediately.
On the other hand, this type of lease is a short-term equipment rental lease agreement that can be canceled by the company even before the lease period expires. This equipment rental lease agreement is usually preferred by companies that need specific equipment for a specific period.
Here, the Lessor rents their equipment for as long as the lessee needs it, which puts him at risk of desuetude. The lessee also has the option to cancel the lease agreement before the expiry. They, however, must first give prior notice and pay the penalty for the breach.
Basic Terms of Equipment Rental Lease Agreement
An equipment rental lease agreement is crucial as it enshrines the contract terms between the lessor and the lessee. If you have been tasked to create an equipment rental lease agreement for your company, make sure to include the following parts:
Duration of the lease
This generally depends on the needs of the company and the cost of leasing the equipment. For smaller businesses who may have to change their equipment regularly, choosing a shorter duration may be more favorable compared to more prominent companies that require expensive equipment, a longer duration of the lease is the best and the most convenient choice.
The equipment rental lease agreement must contain the financial terms, including the timeline of the payment, fees or penalties, the due dates for payments, and more.
Compensation due to the lessor
This is a vital piece of information that must be included in the lease agreement for the lessee’s benefit. Before signing the agreement, the company must consider its projected cash flow to determine if it can make the payments. These payments get spread out until the lease period expires or when the lessee purchases the leased equipment from the lessor.
Equipment’s market value
Most equipment for lease is usually costly. The lessee must first know and understand the market value of such equipment before signing an equipment rental lease agreement. This will help them properly evaluate any insurance or related costs to protect themselves and their company against loss or damage to the leased equipment.
This typically depends on the type of lease agreement you create. In some cases, the lessee may have to pay a specific amount as the tax on the leased equipment. Therefore, it is essential to include this information in the lease agreement for the lessee to know their responsibilities.
Provision for cancellation
An equipment rental lease agreement must contain a guideline for the termination of the agreement. For whatever reason, the company may decide to terminate the agreement before the expiry period.
Some common reasons that may trigger the cancellation of the agreement include:
- Outdated equipment
- Better alternatives
- Defective equipment
The leasing companies often charge the lessee with fines for cancellations.
Renewal options of the lessee
This option should be included should the lessee want to renew the agreement. Include a proper and easy-to-follow guide on how they can renew their contract at the lease period’s expiry. The lessee might reduce to purchase or continue periodic payments after the agreement expires.
Free Templates and Forms
Download and use our free equipment rental lease template when renting out your equipment to ensure that the other party agrees with all the terms to help you avoid any inconveniences. Equipment owners usually use the templates as it helps them save a lot of time creating equipment rental lease agreements.
How to Use an Equipment Lease Agreement
Any business, individual, organization, or company may use an equipment rental lease agreement if they need to rent a piece of equipment for any reason. Here are some tips for both the Lessor and the Lessee to follow when creating an equipment rental lease agreement:
- The lessor must create an equipment rental lease agreement that includes all vital information.
- After drafting the document, the lessor must give the lessee the document for review.
- If they agree to the terms and conditions of the agreement, they can then proceed to sign the document. If not, the lessor will then have to make the necessary adjustment.
- If the lessee is a company, the document must be signed by an authorized person and affix the company’s seal on the document as well.
- After the agreement has been made, the lessor must provide a copy of the lessee within a specified time.
Frequently Asked Questions
Why do companies need an equipment rental lease agreement?
At any one point, companies need to acquire new equipment for their businesses, and they have only three ways to do this. First, they may decide to buy the equipment they need using cash. Second, the company may decide to buy the equipment by taking out a loan from a bank.
Third, the company can enter into an equipment rental lease agreement so it can rent the equipment at a lower price. Leasing equipment is a great way for companies to make the upgrades they need without having to spend too much money.