Equipment Lease Agreements: Common Rates, Terms, & Conditions
Last updated on October 27, 2022 by
Science and technology feed off one another. As scientific techniques are tweaked and improved, new technology is introduced to reflect those advances, resulting in a variety of new equipment types.
While this cycle accelerates innovation, it also leads to increased risk of obsolescence, among other issues. Having an outdated technology core (as well as lacking specialized equipment) can cause a wide range of inefficiencies and inaccuracies that negatively impact the quality of life for scientists and researchers in the life sciences.
With this in mind, whether the organization is trying to create a new medical, diagnostic, or therapeutic advancement, you can guess that life sciences companies often find themselves in a constant search for new and reliable equipment to help reach that next research milestone.
But buying new lab equipment can be costly, and the need to regularly replace unreliable or inefficient instruments can lead to shrinking budgets, shortened cash runway, and other disruptive financial woes. Rather than purchase, labs are financing equipment acquisitions more and more to keep up with their own financial and operational demands and the progress of competition.
Equipment leasing allows growing laboratories to get the equipment needed to reach milestone goals without tying up large amounts of capital in expensive instrumentation that could be better allocated to R&D.
The problem is, signing a lease agreement can include a lot of terminology, terms, and conditions that are confusing if you haven’t leased or financed something before.
What Is an Equipment Lease Agreement?
An equipment lease agreement, sometimes referred to as an equipment rental agreement, is a contractual agreement between parties that outlines the terms and conditions whereby the renter, or lessee, pays (typically in monthly installments) a fee to the owner of the equipment, or the lessor, for the right to use that equipment for a specific period of time.
There are different types of leases, and the contents of each lease agreement can differ based on the type, as well as the leasing company or lender.
Lease agreements are typically reserved for long-term rentals lasting 12 months or more. If you’re looking to rent or lease for the short-term, you may receive an equipment rental agreement instead. Terms and conditions may also differ based on the length of the lease/rental.
How Does The Equipment Lease Process Work & When Will You Receive a Lease Agreement?
Equipment leasing involves a series of steps, from picking the equipment you want to getting an instrument quote through a manufacturer to finalizing a lease agreement and submitting your first payment.
The first step you will want to take is to decide which brand and model you’re interested in. It can be important to do a demo with the manufacturer to determine if the equipment will meet your needs or not. Next, with the right equipment in mind, you’ll want to reach out to the leasing company by submitting a form on the website and obtain an instrument quote or purchase order (PO) from the manufacturer.
It almost never hurts to reach out to the company before you have an instrument quote, however, as this initial conversation allows you to learn more about their services and they have an opportunity to understand your exact needs. But, this instrument quote or PO will be one of the first items the leasing company you’re working with will ask you for, and will give them what they need to begin creating a lease estimate and perform underwriting.
After underwriting has been completed, and you’ve been approved for a lease, this is where you’ll receive a lease agreement that you will be able to review.
Common Rates, Terms, Conditions, & Concepts
Lease agreement terms and conditions can be confusing if you’ve never leased equipment before or reviewed a contract yourself. Although equipment lease agreements will vary by company and contract, there are some general details we can cover that will at least give you a general idea of what to expect when looking to lease equipment and demystify the lease experience.
Generally speaking, interest rates attached to an equipment lease can range from 7% to 16%, but will depend on several factors. For long-term equipment leases that last between two and five years, these factors may include your company’s credit, the type of equipment you plan on leasing, and various financial factors of your business (e.g., your cash runway, your burn rate, and even your industry) will affect the lease’s rate.
You may face specific fees and other costs when leasing. These can include origination or insurance fees and taxes. Be sure to understand the total cost of the lease by reviewing the agreement and any additional paperwork that outlines the fees and expenses associated with leasing the equipment. This way, you won’t get caught off guard by a “surprise” expense.
Terms & Conditions
The lease agreement terms and conditions or provisions will vary based on the lessor and duration of the lease. However, you will almost always see some specific terms that form the basis of the contract, such as:
- Lease term
- Financial terms
- Payments due
- Tax responsibility
- Cancelation provisions
- End-of-lease options
Make sure to understand what every term or condition is outlining—having an attorney or law firm review the agreement for you can help significantly. Misunderstanding a lease agreement can lead to complicated situations between the lessee and lessor. Below we outline some standard terms and conditions in more detail:
The term “Equipment” might be listed as “Selection of Equipment,” or “Equipment.” No matter what wording appears in the agreement, this section will be used to list the equipment being leased, along with any peripherals or attachments related to or affixed to the equipment.
This section will indicate the dates on which the lease will begin and end.
The security deposit is an initial up-front payment to be held by the lessor to “secure” performance of the terms of the lease. Each lessor uses different internal criteria for setting the amount, but the deposit is generally paid on or before the lease signing. It cannot be used by the lessee to pay money it owes under the lease.
This provision may also outline additional information regarding the deposit, such as what will happen to the deposit if the lessee breaches any terms or conditions of the lease. For example, this provision might state that the lessor can use the deposit to recoup payments if the lessee defaults, and that the lessee must replenish the deposit.
These terms are standard in the equipment leasing industry and are used to protect the leasing company if a client cannot make any more payments; however, it is important to understand how the deposit can be used and if/when it will be returned.
The payments provision will show that the lessee has agreed to pay the lessor a specific number of periodic payments at a certain dollar amount, If you lease multiple pieces of equipment, the periodic payments are typically broken down by piece of equipment in an exhibit to the lease or a separate lease schedule.
Sometimes you will see payments referred to as rental payments, monthly payments, or lease payments. This section also lists when payments should be made during the term of the lease, as well as what happens when a payment is missed and a late payment must be made.
Delivery & Acceptance of Equipment
Delivery and acceptance provisions set out the procedure/process through which the equipment is sent to the lessee to meet the obligations under the lease. Delivery clauses will typically outline how and where delivery is to be made and, depending on the type of delivery, the charges for that delivery may be included in the lessee’s expenses.
“Acceptance” clauses set out the method and criteria for the lessee to accept the equipment. Acceptance by the lessee typically occurs at the time of delivery.
Use & Equipment Location
This provision will state that the equipment needs to be maintained carefully and used properly by the lessee and that it may only be used by lessee. It may also state that the lessee must comply with the laws, rules, and orders regarding the equipment’s use, maintenance, and storage.
The equipment location provision will state that the equipment needs to be used at an agreed-upon place and may include that the equipment can’t be used elsewhere without the lessor’s prior written consent.
This section may also state that the lessee is responsible for proper installation, use and maintenance of the equipment, in compliance with the manufacturer’s guidelines and warranty..
Sometimes there will be a provision regarding software and software licenses, which might say that the lessee will have to purchase the software and license themselves unless it’s specifically included in the equipment lease.
Inspection, Maintenance & Repair
Some equipment leases will not include the option for comprehensive maintenance and repairs during the duration of the lease. This is generally referred to as service coverage. Excedr’s operating leases always include service coverage. This way you can have peace of mind any issues with your equipment will be handled, and you won’t be stuck with out-of-pocket costs.
When service coverage is not included, the lease agreement’s “Inspection, Maintenance, and Repair” term—which might be referred to as “Responsibility for Care, Use, and Maintenance of Equipment” or something similar—will state that the lessee is required to maintain the instrument in good working order and make repairs to the equipment at their own expense.
Suppose a service coverage option is included in the lease (and the lessee has agreed to these services). In that case, the lessee will agree to permit an authorized designee of the lessor to inspect the equipment, conduct maintenance as seen fit throughout the lease term, and make repairs when needed. These costs are included in the lease, meaning the lessee will not have to pay out-of-pocket for maintenance and repairs brought on by reasonable wear-and-tear. Certain repairs will also be covered by warranty.
This section may also include a provision regarding the loss or destruction of the equipment. In most cases, the contract will typically state that it is up to the lessee to replace the equipment and cover the costs.
The “Insurance” section will set out whether the lessee needs to get insurance coverage for the leased equipment. If insurance is required, this section will be the lessee’s agreement to obtain and maintain specific insurance for the equipment during the lease term. Insurance requirements can include property casualty insurance and general liability insurance.
This section will also occasionally suggest who should be insured under the policy. The policy required in this section will be the primary policy and will most likely only be allowed to change after the lessee has given the lessor notice.
“Ownership” will define the owner of the equipment. Depending on the classification of the equipment lease, the lessee may or may not receive ownership rights, and instead only receive the rights for the use of the equipment. For example, under an operating lease, the lessor will remain the equipment owner during the lease term. If that is the case, then the Ownership section will outline that.
It may also include conditions that define the lessee’s agreement to be responsible for any damages to the equipment during the lease term; and it may include conditions to maintain ownership such as requiring labels, plates, or stickers identifying the lessor as owner that must be affixed to the leased equipment, and that the equipment continues to be considered personable and movable property even if it is installed or attached to any immovable property, building, or structure.
The “Liens” section will represent the lessee’s agreement to not allow any liens, levies, or encumbrances to be placed against the equipment, except those that may be placed at the lessor’s request. It ensures that the lessor’s title or right to ownership will not be negatively impacted.
Compliance with Laws, Taxes, & Fees
This section will essentially define the lessee’s obligations to comply with laws related to the lease and pay taxes and fees promptly. In short, the lessee will agree to comply with and conform to applicable laws, ordinances, regulations, and legislation relating to the equipment and its use, installation, testing, possession, repair, maintenance, and more throughout the lease term.
It will also comply under this section to pay specific fees related to the equipment and its use, such as taxes, licenses, charges, and other assessments and related penalties that might occur.
Lessee & Lessor Covenants, Representation, & Warranties
The representation & warranties aspect of a lease agreement will define that the lessee and lessor accurately represent themselves and that their promises within the contract are true. Depending on the contract, you may see lessee and lessor representations and warranties combined in a single item or separately.
A lessor’s representation can be a promise that it is doing what it says it’s doing. Its warranties define that the lessor is following rules and regulations, that it can lease the equipment, and that the equipment is what the lessor says it is.
A lessee’s representation and warranties will typically include the promise that it accurately represents itself and warrants they can lease the equipment and that there will be no material changes to the company’s financial condition as of the lease agreement date.
Because most lessors do not manufacture or handle the equipment themselves, warranties in leases are typically limited to those offered by the manufacturers. You can expect to see liability and warranty limits in most equipment leases.
The “Entire Agreement” section will warrant that everything that’s needed in this agreement is contained within the agreement, meaning there are no additional written or oral promises, conditions, understandings, or other agreements relating to the subject matter of this agreement.
Any and all agreements you have with the lessor need to be set out in the lease to be enforceable. So if a provision you discussed is not in the lease, you likely have very limited legal rights to hold the other party to the promise made before the lease was signed.
This will outline what will happen to the lease if either party fails to live up to its obligations under the lease. A lessee can default on a lease in a number of ways. For example, a lessee can default if they fail to miss a scheduled lease payment or a representation or warranty made by the lessee turns out to be false. Most leases require that the “defaulting” party receive written notice of the default and a specified number of days to “cure” or fix the default.
In the case of a missed payment, many lessors will send out a written notice requiring payment be made in 3 or 5 days before the lessor can “call” a breach and exercise its rights under the lease (like terminating the lease or repossessing the equipment).
In other instances, the lease may allow the lessee to have more time to “cure” the default. For instance, in the case of failure to maintain insurance, the lessee may have 5, 10, or 20 days to prove that they have the required insurance in place.
The “Termination Payment” section will define what will be required of the lessee in the case they wish to terminate the lease or if it has failed to perform its obligations outlined in the lease agreement. Early termination or cancellation will typically involve payment obligations for the remainder of the lease until the lessor is in possession of the equipment.
For example, the lessee may be obligated to pay the total of all remaining monthly payments due under the lease and will forfeit any rights under the lease, such as its right to use the equipment.
Return of Equipment
“Return of Equipment” sets out the lessor’s and lessee’s obligations in connection with the return of the equipment, including preparation for pick-up (cleaning, sanitizing and uninstalling the equipment), and scheduling the pick-up.
The lessee typically will need to have all related records (repair, maintenance, service logs, alterations, etc.) ready to turn over to the lessor. Return of equipment will also likely define the lessee’s obligation to cooperate with the lessor’s efforts to pick up the equipment.
This section will include the options available to the lessee at the end of the lease term. In some cases, this section may be an “Option to Purchase” provision, in which it is made clear the lessee can exercise an option to purchase the equipment at the fair market value (FMV) after the lease has ended. The FMV price will be set at the time of the proposed purchase.
Equipment Lease Agreement Templates
Businesses and individuals often seek out business and legal templates if they plan on starting a business that requires them. It’s not as common for people to search for a template if they’re on the “buyer” side of the transaction. However, you might be interested in seeing a couple of templates before you get to that stage with a lessor.
Whether you’re interested in a finance lease or an operating lease, numerous equipment lease agreement templates are available online. While we don’t think it’s a good idea to base your expectations on these templates, they can give you an idea of what an agreement might include. TemplateLab provides a long list of 44 equipment lease agreement templates that you can check out, if interested.
Is Equipment Leasing for You?
Equipment lease agreements can feel daunting when the language used in the agreement sounds ambiguous. Having a stronger understanding of what the terms and conditions of the agreement mean can make it easier to leverage the benefits of leasing for your small business or startup.
Leasing equipment can be a smart way to spread costs out and save working capital for scaling R&D. That means you have more cash on hand to hire scientists, buy supplies and consumables, and expand your lab space.
If you’re looking to extend your cash runway because your money has already been allocated to something else, like paying salaries, renting lab space, and more, then leasing the equipment you need is one of the easiest ways to do so.
Check out Excedr’s leasing program to learn more about the benefits of equipment leasing.