What are the essential components of an equipment lease?

On Behalf of | Apr 23, 2020 | Business Law

Equipment Leases

Equipment that is essential to business operations often come with hefty price tags that run into the millions to billions of dollar range. Because of this, more than 80% of American companies lease equipment rather than purchase it outright, according to the Corporate Finance Institute. Equipment leases fall into one of two categories: Operating lease and capital lease. An operating lease allows businesses to borrow a piece of equipment for the short-term, while a capital lease allows businesses to lease equipment for long periods and possibly purchase it at the end of the contract. Regardless of the type of lease agreement you enter, your contract should contain certain provisions. 

Financial terms 

Any sound contract will include the financial responsibilities of each party. In this case, the lease agreement should specify when you must make your payments and when the final payment is due. 


The lease duration may dictate what type of contract you enter — an operating agreement or capital agreement. It will also depend on your company’s needs and budget. If your business’s needs are always changing, a short-term lease may be favorable. However, if you use a type of equipment regularly, and if the equipment is expensive, it may make more sense for you to opt for a capital agreement. 

Tax liability  

Depending on the type of lease agreement you enter, you may be responsible for paying the taxes on a certain piece of equipment. Knowing the tax liabilities on certain types of equipment can help you avoid unanticipated costs, or budget accordingly. 

Equipment market value 

If you plan to lease high-dollar equipment, you will want to understand its true market value. This will come in handy when it comes time to assess the insurance costs for protecting the equipment against becoming damaged or lost. 

Cancellation provisions 

There are several reasons you may wish to cancel a lease agreement. For instance, your company may change directions and no longer need the equipment, or the equipment becomes obsolete and you need an alternative to stay competitive. Because lease cancellations are common, it is important that your agreement includes guidelines for cancellations, as well as the associated fees and penalties, if applicable. 

Lease renewal provisions 

Your lease should account for the possibility that you will make it through the lease term and want to renew. In addition to detailing the renewal process, your contract should also state whether the lessor will reduce lease payments upon renewal or if you will have the option to purchase the equipment. 

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