Businesses often lease products, spaces or other goods. It might be a storefront in a strip mall, high-tech computer or photocopying equipment, or other tangible assets. In many instances, leasing makes sense from a cash flow perspective. After all, if you’re starting a restaurant, leasing an expensive Viking range makes far more sense than buying one right away.
How does equipment lease work?
Unfortunately, business owners often run into problems because they don’t thoroughly vet a lease before signing it, or maybe they don’t understand the legalese. Oftentimes, a large bank is the one issuing the equipment lease. The same goes if you’re leasing space from a large real estate company. Big banks have teams of lawyers who insert the contract every possible clause to favor the bank—not favor you. If you’re like many business owners, you probably think there’s nothing you can do to negotiate the onerous terms in the fine print, so you sign the lease and hope for the best. A few months down the road, if you miss a payment or don’t give enough notice on a lease cancellation, those draconian provisions suddenly take effect.
Aggressive litigation practices
In some cases, violating a condition in the lease could activate clauses for actions such as accelerated payments. This could mean, for example, that an entire lease payment of $100,000 is due now—not just the $1,000 a month you’ve been paying. And the bank’s lawyers will aggressively try to collect it. With a real estate lease, you could get evicted, which could put you out of business.
Some leasors are almost predatory in how they approach leases. They actually want you to default so they can come after you for more money. One of my clients was sued for $200,000 for returning computer equipment but neglecting to include a few power cords, which were worth a couple hundred dollars at most. That’s why it’s important to go into a lease agreement with your eyes open.
You need to be very aware of any extreme penalties that could result in you owing a significant amount of money that could torpedo our business. In my experience defending clients in lease situations, banks are extremely assertive about litigation. They’ll head straight to court to get their money.
Leases are highly enforceable
Many banks require a business owner, especially if the business isn’t well established, to sign a personal guarantee. This means your business is potentially on the hook for a lot of money if you default on a lease, and so are you personally. The last thing you want is to have a business problem result in the bank owning your house and your personal property along with whatever personal assets you have.
You should also know that judges are supposed to enforce contracts as they’re written, even if they have very burdensome terms. That’s why organizations should have legal counsel walk them through the contract, explain the terms of the lease, and make sure they know the ramifications if they breach the deal.
Have questions about a lease? Get in touch with me today to understand your options.