The equipment lease agreement is an agreement between the lessor and lessee which allows the lessee to use the equipment for a defined period.
Meaning of Equipment Lease Agreement
An equipment lease agreement is an undertaking between two parties, the lessor and the lessee, to use the equipment. The lessor is a party who owns the equipment, and the 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 the 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 the lease agreement entered between both parties.
Why do 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 a loan from the bank to purchase or lease the equipment. Equipment leasing provides a great opportunity for a business to upgrade itself without incurring too much upfront cost.
It is a better option than buying the equipment for various reasons:
- It leads to tax advantages.
- This results in saving the cost of purchasing an entirely new asset.
- Provides lower monthly payments.
- It improves the flow of working capital.
- It provides access to the 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. 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 a lease agreement is termed as an equipment lease agreement with an option to purchase.
Also read about Equipment Leasing Companies.
Long Term Equipment Lease Agreement
Long term equipment lease agreement is a long-term contract that cannot be canceled. 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 of tax benefits 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.
The equipment lease agreement is an essential document that clearly states the terms of the lease, parties to the agreement, rights and obligations 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 important that the parties entering into the agreement thoroughly go through the terms and conditions mentioned in the agreement.
Also read – Accounting for Equipment Lease.