NASE Blogs


Apr 07, 2011

Lessor:  The person or company that owns equipment and is leasing it out to others

Lessee:  The person or company who will use the leased equipment


1)  Begin with realistic expectations and an open mind, and if you’re relatively new in the business for which you’re going to lease equipment, pay attention to the issues you encounter.  The lessor might have more experience than you do and you’ll probably find that you’re getting an education as you proceed.   That doesn’t mean that you need to be vulnerable and the following should help you avoid any serious mistakes.


2)  Discuss any prospective lease with your CPA so that you are aware of the tax advantages or disadvantages and any strategies including such things as whether you want a “true tax lease” or a “non tax lease” and whether you want an “operating lease” or a “capital lease”.


3)  If the lease is for a significant time period, or for an expensive piece of equipment, or for a sophisticated piece of equipment that could present problems in operation and/or durability, both parties should have legal representation.  This is probably more important for the lessee since lessors usually had a competent attorney draft their leases.  The best idea really is this:  If you’re going to lease equipment have a lawyer familiar with leasing review your leases.

4)  You should also personally review all of the terms of the lease.  No matter how familiar an attorney might be with business leases, if there are special considerations or provisions meaningful only to you because of the nature of your business or project you must take care to assure that all of the lease provisions fit the situation. 

5)  All of the obligations of both parties should be addressed.  Usually there are sections indicating something like "Obligations of the Lessor" and  “Obligations of the Lessee”, each of which should detail all of that party’s duties and obligations under the lease.  If a contract is incomplete it is more likely to harm the lessee than the lessor.

6)  Equipment is expected to perform in certain ways but the parties may have widely differing expectations.  It’s not uncommon for the lessor to believe that the equipment is satisfactory for the purpose(s) of the lessee because the lessee’s needs and expectations haven’t been made clear at the outset.  Be certain that the lease provisions detail the performance of the equipment in order to assure that it will handle the expected workload, whatever it might be.  All performance issues should be clarified before you sign any equipment lease.

7)  A lease should clearly set forth who is obligated to do what in the event of a problem.   For example, if a piece of equipment turns out to be defective the salesperson probably can’t fix it, and doesn’t want to try.  Similarly, if lease payments are late, the lessor should know exactly who to contact and how to reach them.  In short, both the lessor and the lessee should know exactly to whom to direct questions or problems.

8)  Be certain that the lease has provisions for unusual circumstances.  Special issues such as theft of equipment or software problems or the possibility of litigation need to be addressed and many leases omit such issues. Other things often not addressed include termination of a party’s business, complete destruction of the leased equipment, and adequate insurance.

9)  In some instances you might want the term of the lease(s) to coincide closely with the term of the project(s) for which the equipment will be used, and provision should be made both for projects that take longer than expected, and for those that terminate earlier than expected

Finally, and perhaps most important of all there are special leases for almost all kinds of specialized equipment and these leases contain provisions applicable only to leases of that particular equipment.  An example is computers and related equipment where provision must be made for such things as what software will be provided, if and when it will be updated, etc. Software lease provisions should provide that software will continue to be kept current and useful for the same period as the basic computer lease(s). The lease should insure that the lease equipment is compatible, both with other equipment leased from the same lessor and with equipment purchased or leased elsewhere.  

The list of special equipment is almost endless including such things as: Heavy equipment, restaurant equipment, construction equipment, personal fitness equipment, medical and hospital equipment.  You must recognize that special equipment leases require substantial legal expertise and should be entered into with great care.

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