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CHECKLIST

ISSUES RELATED TO A LEASE AGREEMENT


This document is a checklist of the most common issues that arise in a lease agreement. A careful review of the issues explained in this checklist can assist you in reviewing what will be important when you negotiates an equipment lease.


Term and rent 

What is the initial term of the lease, and what is the rent? How and when must rent be paid?


Claims against supplier 

Does the lessee have the right to proceed directly against a supplier on warranties, refunds, price adjustments and other claims? Does the lessee have the right to retain any settlement?


Transfers 

Does the lease restrict the lessor's right to transfer an interest in the leased equipment?


Representations and indemnities 

Are any special representations required to satisfy regulatory requirements? Is the lessee required to assume property taxes, license fees, public liability? To what extent is the lessee obligated to indemnify other parties against various other risks and expenses?


Claims

Can the lessee sue and take other action in the name of the lessor to assert claims against third parties? Is the lessee's right to settlements that compensate for losses protected?


Renewal options 

Does the lease provide for renewal? If so, for what term and at what rent? Keep in mind that renewal options may affect the tax treatment of the transaction. 


Subleasing 

May the lessee sublease the equipment? Under what conditions?


Maintenance 

Who is obligated to maintain the equipment?
Stipulated losses 

What are the specified amounts that the lessee would owe in the event the equipment was lost, stolen, or destroyed by casualty? Are these charges in lieu of or in addition to the value of the lost equipment? Often, stipulated losses are based upon a formula incorporating rental payments for the balance of the lease term and the value of the lost tax advantages to the lessor. If the lessor has the right to sell the lease to investors seeking tax-sheltering advantages, the stipulated losses, sometimes stated in terms of making the lessors whole, may be figured with respect to their lost tax advantages rather than those of the original lessor.


Insurance 

Who is responsible for insuring the equipment? Who is entitled to what part of any insurance 
settlement if the equipment is lost, stolen or damaged?


Amendments 

Does the lease provide for amendments in case of changed circumstances or conditions? This is especially important in long-term leases, when the value of the equipment to the lessee may suddenly decline.


Purchase option 

Does the lessee have the right to purchase the leased equipment? What is the option price and how and when may it be exercised? Keep in mind that purchase options may affect the tax treatment of the transaction.


Termination 

Under what circumstances may the lease be prematurely terminated? Does destruction or loss of equipment terminate the agreement? Are any payments required because of premature termination? Does the lease provide for termination under certain circumstances or conditions, such as legal restrictions that make continued use of the equipment illegal or uneconomical?


Termination costs 

Who is responsible for costs associated with returning equipment to the lessor at the end of the lease term? Dismantling, packing, shipping, insurance and related costs can be substantial.


Master leases 
Does the lease require individual contract negotiations if the lessee wants to add another piece of equipment, or may the lessee make a simple addition to the regular contract describing the new equipment, the rate and the period of the new lease? The latter can yield substantial savings where an ongoing relationship is contemplated.

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