Leasing: There Should Still Be An Agreement

Leasing: There Should Still Be An Agreement

By Diane M. Calabrese / Published May 2017

 

With short-term rentals being all the rage in the United States and around the world, one senses that letting a room—or several rooms—in one’s home is a carefree and easy way to make money. Reports on short-term renters who leave with more than their belongings, damage property, or sue for injuries sustained when they trip over their shoelaces are impossible to find.

If only a lessor of equipment had the same good fortune in the traditional world of commerce as room lessors have in the ‘new’ economy. Unfortunately, fortune sometimes smiles inconsistently.

Real-world happenings do not mean that being a lessor of equipment is a bad idea. It can be a very good idea from a business standpoint.

Distributors help contractors in many ways by providing machines and ancillaries for rentals. A contractor with a one-time or short-term need for a piece of equipment, or uncertainty about the best machine to add for the long term, welcomes being able to rent. So, too, does a contractor with insufficient capital or credit to buy all the equipment required to grow a business.

By providing rentals to contractors, a distributor also benefits. A good relationship may be established that leads to future sales. Assisting contractors with their trial in a new area may bring more business to both contractor and distributor if all goes well.

Russ Johnson, owner of Southside Equipment Inc. in Louisville, KY, has a solid track record with rentals. “We have been sourcing leasing for our customers since 2001,” he says.

There are challenges to leasing equipment, as there are with any business component. “Getting financing for those with less-than-desirable credit” is one of the most challenging, says Johnson.

Yet it’s rewarding to be able to assist a customer with a rental. “Being able to get folks into the equipment they need without a huge financial hit” is one of the most rewarding aspects of leasing equipment, says Johnson.

Lessor or seller? How does a distributor make a decision, which might include both options?

For the distributor, a grounding in what-can-happen is a must. If a machine vanishes periodically, the distributor must be able to tolerate the loss.

“The only sure-fire way that I know of to prevent leased equipment from vanishing is to get suppliers to put some type of GPS system on the equipment,” says Johnson. So, a distributor truly has to be prepared for the occasionally unscrupulous renter.

Some dealer trepidation might be lifted by the knowledge that by setting up a rental component, the dealer helps new and growing contractors. Growth bolsters the entire industry.

Renter or buyer? The contractor answers that question by weighing many factors. It may be possible to rent when it is not possible to buy. Or, perhaps renting allows a contractor to try the newest technology. A rental may include routine maintenance service. And rental payments may offer a tax advantage, being as much as fully deductible.

At the same time, a contractor may actually pay more to lease than to buy, depending upon how long the equipment is leased. Deprecia-tion tax benefits, which may be greater than those that accrue from deductibility of rental payments, will be lost.

As for the old adage to never a lender or a borrower be, ignore it. Each distributor and each contractor must make a unique assessment regarding whether participating in the rental marketplace makes sense. Everything from geographic location to type of equipment becomes a factor.

The L-E-A-S-E Acrostic

Take each letter of the word lease in turn, and we get a good encapsulation of the many things to remember about the good and the bad about leasing.

L–Loaner. There’s a bit of a difference between loaning someone thousands of dollars and leasing someone a piece of equipment worth thousands of dollars. There is collateral (the machine) for the latter. Yet to rent equipment is still to make a loan of sorts. A distributor expects to get the equipment back. If the renter does not meet payment terms, the distributor is left with the machine. Assuming the machine is not damaged by the renter, loss to the bottom line is minimized.

E–Equipment maintenance. A lessor counts on renters to use and maintain the equipment properly. It’s the responsibility of the distributor to give the renter instructions. It’s the responsibility of the renter to follow them.

A–Agreement clarity. There was a time when a simple agreement—perhaps even a verbal one—would suffice. This is not that time. Start with the premise that litigiousness is rampant (except in the ‘new’ economy, apparently). Then develop a written agreement that covers all the elements of the transaction.

The elements include the term of the lease, what the renter will pay and when, what happens if a payment is not made on time, what happens if the machine is damaged, and so on. The lease—or an attachment to the lease—should also include a statement signed by the renter that he or she understands how to operate the machine, maintain the machine, and store the machine. In addition, the attached statement should include the written confirmation of the renter that he or she will not engage in any unsafe practices while on a jobsite with the machine. (In theory, that will protect the distributor from subrogation, except when it does not.)

S–Subrogation. The substitution of one creditor for another is the literal meaning of subrogation. The concept goes well beyond credit and claims of payment today. If a distributor owns and leases a pressure washer, the distributor may be liable for legal claims made against a contractor who does damage or causes injury to others with the pressure washer.

If a contractor sprays a passerby with hot water, the distributor could be held liable for the incident because the distributor has ‘deeper pockets’ and the full judgement against the contractor could not be met by the contractor. The distributor could also be held liable if the contractor claims the incident happened because the contractor was given erroneous instructions in use of a machine.

A distributor will, of course, have any renter sign a waiver of subrogation as a condition of renting. That waiver means the renter agrees not to try to recover funds from the
distributor. Yet if the contractor is injured or injures someone else, a distributor can expect there’s a good chance the waiver of subrogation will be ignored by any plaintiff lawyers. (Theory and practice can be quite different in legal situations.)

Subrogation is a two-way street. A distributor may want to be able to go directly to those responsible for theft of a machine, for instance, and press its case for compensation (restitution) instead of relying on the contractor/renter to do so. The rental agreement should make it clear that in the event of loss of equipment, the renter will work with the distributor.

E–Experience. Setting a price for rentals must be based on experience, which makes it difficult to set prices at first. How much cushion must be built in to the rental price to offset equipment that is damaged, equipment that disappears, and payments that never are made? Over time, it will be easier to arrive at such a figure. If the amount becomes so high that it does not make economic logic to the distributor or the contractor, the distributor may decide to forgo a rental business.

In some geographic locations, distributors may find it easier to establish and sustain a rental business. If a distributor can get to know contractors and forge a relationship with them, it is easier to assess creditworthiness without time-consuming (and potentially deterring) credit checks. It is a balancing act like everything else in business.

Safety Net

Distributors who rent equipment can gain some protection (a safety net) from rental equipment protection insurance. Never assume that the existing liability insurance policy for a business covers rental equipment. (It probably does not.) A distributor can request a quote for such a policy from a current insurer or shop around.

Rental equipment protection covers the equipment when it is in the hands of a renter. The best of the lot will cover the equipment should it be damaged or lost in a natural disaster or the subject of vandalism.

Although the foregoing indicates that holes can be poked in almost any legal agreement, there should still be an agreement. The agreement is part of the safety net for a distributor doing rentals.

Using the Web, it’s easy to find rental agreements that are very strong in terms of protecting the lessor. One example of a precise rental agreement is the Thompson Pump Equipment Protection Plan. The four-page document is available online for review. (Thompson Pump & Manufacturing Co., Inc. is headquartered in Port Orange, FL.) Note that the Thompson plan begins with a strong statement on subrogation.

A distributor who aims to craft an ironclad rental agreement is on a fool’s errand. Crafting the best possible agreement is the goal.