Meaning of Equipment Lease Agreement
An equipment lease agreement is an undertaking between two parties, the lessor and the lessee to use the equipment. Lessor is a party who owns the equipment and lessee is a party who uses the equipment. This is done in exchange for some consideration i.e. lease rentals. The period of usage of equipment is fixed and is termed as lease period. At the end of the lease period, the lessor may give the lessee an option to renew the lease agreement, terminate the same or an option to buy the leased equipment. This depends on the terms and conditions of lease agreement entered between both the parties.
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Why Companies Opt for Equipment Leasing?
A company generally has three ways to get the equipment it needs for the business. It can purchase the equipment with cash or borrow money/take loan from the bank to purchase the equipment or to lease the equipment. Equipment leasing provides a great opportunity for a business to upgrade itself without incurring too much of upfront cost.
It is a better option than buying the equipment for various reasons.
- It leads to tax advantages.
- It results in saving the cost of buying an entirely new asset.
- It provides lower monthly payments.
- It improves the flow of working capital.
- It provides access to latest technology at an affordable cost
Equipment Lease Agreement with an Option to Purchase
This is a contract between the lessor and the lessee, where the latter is given an option to purchase the equipment after the tenure of the lease is over. Like for example, the tenure of the lease agreement between John (equipment owner) and Smith (lessee) is for 10 years. On the expiry of the period if Smith has the option to purchase the leased equipment then such lease agreement is termed as equipment lease agreement with an option to purchase.
Long Term Equipment Lease Agreement
Long term equipment lease agreement is a long term contract which cannot be cancelled. Under this type of agreement, the lessee is required to fulfill all the obligations associated with the asset, like insurance, maintenance, etc. The lessee can avail tax benefit for the leased asset. The tenure of long term lease equipment is fixed as per the terms and conditions suitable to both the lessor and the lessee.
Equipment lease agreement is an essential document which clearly states the terms of the lease, parties to the agreement, rights and obligation of the parties, ownership of leased asset, liability for losses and damages, warranty and guarantee clause, who is responsible for paying the taxes and maintenance costs, etc.
So it is very importance that the parties entering into the agreement, thoroughly go through the terms and conditions mentioned in the agreement.