Is Your IT Equipment Lease Missing the Lessor’s Primary Obligation?

When leasing IT equipment, the lessor (the company providing the equipment) has one main obligation. However, most leases overlook this critical aspect completely, exposing the lessee (the organization leasing the equipment) to unnecessary risk.

Although it sounds simple, a lessor’s primary function under a lease agreement is to pay for the equipment. “Isn’t that implied or understood?” you might ask. The short answer is “yes,” but the longer answer involves a “but.” Yes, it may be implied or understood, but it often costs a lot of money to establish what was implied or understood between the parties when it is missing from an agreement, and even then, the implication or understanding may not be enforceable.

Your next question might be, “What’s the potential harm if that obligation is missing?” To illustrate, consider an extreme example of what happened to one lessee*:

• The lessor leased 500 laptops to ABC company.
• ABC began making payments to the lessor as required under the lease.
• 30 days after the lease effective date, the lessor sold the lease-payment stream to a third party.
• ABC began making payments to the third party as required.
• The lessor never paid the manufacturer for the 500 laptops.
• 90 days into the lease, the manufacturer repossessed the 500 laptops from ABC.
• ABC still had to make payments to the third party for the duration of the lease.

*The concepts remain the same, but the facts have been changed to simplify the example and preserve confidentiality.

Our Take

Outrageous? You bet. Could it have been easily prevented? Absolutely!

Here are three concepts to add to your IT equipment lease to prevent a similar or related situation from happening to you:

1. Create an obligation for the lessor to pay the manufacturer (or seller, as applicable) no later than 15 days after you formally accept the equipment.
2. Require proof of payment to the manufacturer and clean title to the equipment in the name of the lessor.
3. Reserve the right in your sole discretion: a) to terminate the lease without further obligation to the lessor if items 1. and 2. above do not occur; or b) to purchase the equipment directly from the manufacturer (or seller) and have the lease terminate automatically without any further obligation to the lessor.

With a little prevention and a couple of additional paragraphs in the lease, you can improve your position and mitigate this risk.