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Equipment Lease Issues. The University of Texas System Office of General Counsel Scott Patterson, Attorney. Equipment Lease Issues. Unconditional Payment Obligations Creation of Multiple Leases Dependent Lease Provisions Acceleration of Payment Lessor as “Middleman”
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Equipment Lease Issues The University of Texas System Office of General Counsel Scott Patterson, Attorney
Equipment Lease Issues • Unconditional Payment Obligations • Creation of Multiple Leases • Dependent Lease Provisions • Acceleration of Payment • Lessor as “Middleman” • Addition of Leased Items NOTE: These issues can also arise in “Rental Agreements.”
Equipment LeasesUnconditional Payment Obligations PROBLEM: University is unconditionally obligated to pay Lessor (or Lessor’s Assignee) even if Lessor in breach or if leased equipment is defective. REASONS: Equipment Obsolescence, Lessor’s Sale of Payments to Factor RECOMMENDATIONS: • Try to rent rather than lease in order to be able to terminate payment obligation. • If equipment cannot be rented: • consider purchasing the leased equipment, or • reduce the term of lease as much as possible.
Equipment LeasesCreation of Multiple Leases PROBLEM: Lease language divides lease into multiple independently enforceable agreements: • Separate leases for different types of equipment. • Distinct contracts for equipment and maintenance. REASON: Limits University’s recourse against Lessor in the event of Lessor’s breach. RECOMMENDATION: Try to delete or modify so University and Lessor enter into a single lease agreement – provides University with more leverage in the event of Lessor’s breach. (However, beware of unconditional payment obligations in lease.)
Equipment LeasesDependent Lease Provisions PROBLEM: Lease limits/removes Lessor’s obligations unless University obtains another product or service from Lessor (e.g., maintenance and support). RISK: Can be difficult to spot; typically appear in “cross references” between two lease provisions. RECOMMENDATIONS: Determine if reasonable. If not reasonable, try to eliminate. If possible, point out to the Lessor the lack of a relationship between the dependent provisions.
Equipment LeasesAcceleration of Payment PROBLEM: Lease requires University to make all past due and future payments under the lease if University defaults under the lease. RECOMMENDATION: Try to delete acceleration provisions so that University is only responsible for payments as they become due. However, note that Lessor may refuse to enter into such a lease.
Equipment Leases When Lessor is a “Middleman” PROBLEMS: • Lessor does not warrant or maintain leased equipment. Instead, such warranties and maintenance are to be provided by a third party (e.g., equipment manufacturer.) • Leased equipment includes software that is owned and licensed by a third party, not by Lessor. RECOMMENDATIONS: • Ensure that all third party warranties and licenses are transferred to the University in writing. • Ensure University has right to directly enforce all warranties and licenses.
Equipment Leases When Lessor is a “Middleman” RECOMMENDATIONS (con’t): • Ensure University has right to directly request performance of maintenance. • Try to make Lessor responsible for putting such warranties, licenses, and maintenance in place. • Lessor should notify warrantor/licensor. • Lessor should make all payments to such third party warrantors/licensors/maintainers. • Ensure that Lessor is required to assist the University in • enforcing licenses/warranties • ensuring correct performance of maintenance.
Equipment LeasesAddition of Leased Items PROBLEMS: • Leases permits new items to be easily added to the lease. • Lease is a “Master Agreement”: • Lease terms and conditions are set forth in “Master Agreement”. • Actual equipment leased is identified in additional documents that are entered into under the “Master Agreement”.
Equipment LeasesAddition of Leased Items RISKS: • Existing lease terms may not be applicable to the equipment being added to the lease. • Documents in which the newly leased equipment are identified may include new contractual terms. • Lease-purchases over $250,000 or for a term longer than 5 years must be reviewed and approved by the Bond Review Board (Chapter 1231, Texas Government Code.) This step may be missed when new equipment is added to the lease. • May result in the parties entering into numerous additional documents in order to add/delete equipment under the lease.
Equipment LeasesAddition of Leased Items RECOMMENDATIONS: • Only enter into leases that specifically identify the equipment to be leased and the term of the lease. • Delete language permitting equipment to be added to the lease in the future. • If additional equipment is to be leased from that Lessor in the future, use a lease previously executed with that Lessor as a starting point for development of the new lease.
