Many businesses lease equipment, large and small, day in and day out, so how complicated can it be? Here are some hints which might stop you from finding out the hard way.
Q: We leased some machinery a long time ago, and what we’ve paid in rentals to the finance company is much more than the capital cost of the machinery. We don’t need the machinery any more, so we can sell it, right?
A: Although you’ve paid the value of the machinery and then some, if it’s a lease agreement, the machinery belongs to the finance company and you have no right to sell it. The finance company could sue you for wrongfully converting its goods to your own use, and your purchaser may sue you for the return of the purchase price if it hasn’t obtained good title to the machinery.
Q: The photocopier we leased 3 years ago isn’t sufficient for our purposes any more, and we’ve got a cheaper offer for a better machine with a rival supplier but our existing supplier says we are tied in to them for another year. Are we stuck with the old copier?
A: Very possibly. Auto-renewal provisions can be tucked away in the small print. When signing up to an agreement at the outset, its worth putting in a diary reminder (for both the director/manager who signs the agreement and also for the Facilities Manager/Office Supervisor to review whether and when notice has to be given to terminate a lease agreement to prevent being tied in for another year.
Q: We’ve had one problem after another with some equipment we have just leased. The engineer has been out time and again to no avail, but isn’t returning our calls now. What can we do?
A: You may have a separate maintenance contract with the supplier, but it’s the finance company who is leasing you the equipment, and it’s the finance company who is contractually obliged to supply you with equipment which meets the terms of the contract, both express and implied. So it’s the finance company you have to complain to. It’s a complex area, and getting advice at an early stage is essential to make sure you have not lost rights to reject the equipment and get a refund.
Q: I’ve heard there are 2 types of leasing, operating leasing and finance leasing. What’s the difference and could it make any difference to our business?
A: In simple terms, rentals paid under an operating lease cover only a proportion of the initial cost of the equipment and at the end of the hire period, the lease company have a valuable asset which it can sell (or lease again). Under a finance lease, a substantial portion of the capital value of the equipment is paid by the hirer, and at the end of the hire period the equipment is commonly at the end of its working life with little value. In each case, the rentals also include the lease company’s return on the investment it made in purchasing the equipment. Rentals under an operating lease are not currently required to be shown in a company’s balance sheet, and advice from your accountant on the most tax efficient form of leasing should be sought.