Equipment lease agreement: How-to guide

Your operation needs the latest technology to compete effectively in today’s business world. Buying equipment can use up available funds and may saddle your company with outdated property. Equipment leasing may be an excellent way to update your business without incurring significant upfront costs.

With an equipment lease or equipment rental agreement, almost any kind of property can be leased, from computers and heavy machinery to phone lines and cars. When equipment is leased, the renter can have it and use it for a certain time period. The renter just needs to pay the property owner a rental fee.

For a business, leasing equipment may be better than buying for many reasons. A lease can provide lower monthly payments, a fixed financing rate, certain tax advantages, conservation of working capital, and immediate access to up-to-date business tools.

On the other hand, long-term leasing may be more expensive than buying the equipment outright. There are many factors that contribute to a decision about whether leasing or buying is right for a given company, including the nature of its industry and the types of equipment it’s interested in.

This article covers everything you need to customize and complete your equipment lease agreement.

Instructions you need to follow in an equipment rental agreement

Use of the equipment

An equipment lease is an agreement in which one party (the “lessor”) gives the other party (the “lessee”) the right to have and use (but not own) the lessor’s equipment for a certain period of time.

In exchange, the lessee will make payments to the lessor and be responsible for maintaining and paying taxes on the equipment during the lease period. At the end of that period, depending on the lease, the lessee may be allowed to buy the equipment it has been leasing. In other cases, the lessee may be allowed to renew the lease for another term.

Types of equipment that can be leased

There are many types of equipment that can be leased, from furniture to phones and forklifts to copiers. Generally, items that are valued under a certain amount (usually around $5,000) are purchased, not leased.

Getting the right equipment for your business

There are usually three ways a company can get the business equipment it needs:

• Buy with cash
• Borrow money to buy
• Lease

For new companies, using available capital to make cash payments may not be possible (or wise). Borrowing money may stretch a company’s credit line and be more costly in the long run after calculating interest payments.

Leasing equipment will let an organization:

• Keep cash on hand
• Save the credit line
• Obtain certain tax benefits

In addition, if the equipment needs to be upgraded or changed consistently (e.g., computers), a lease won’t leave the company owning the old property—the lessee can sign a lease for the newer property when the need arises.

Terms and conditions

Before sitting down to sign the lease, decide what your goals are. A good agreement is one that captures the intentions of the parties accurately. Clarify your agreement's terms and conditions before writing them down.

Review the lease properly 

Allow each party to spend time reviewing the lease. Each party must get ample time to understand the terms or how those might affect the lease as a whole.

Both parties should ensure that the agreed terms and conditions are clearly mentioned. It’s always better to be over-explanatory to avoid any doubts and misunderstandings.

Lease renewals

If both parties expect to have an ongoing relationship, use the equipment rental agreement to create a “master lease.”

This will allow you to keep the same document for a long time, adding or taking out equipment or changing certain terms (e.g., the lease rate, the expiration date, etc.) by writing new exhibits. You won’t have to change or renegotiate other terms of the agreement: most of the text will remain the same.

Warranty of merchantability

As a lessor, you may have concerns about providing a “warranty of merchantability” for the leased equipment.

A warranty of merchantability is a promise that the property will meet an ordinary buyer’s expectations (in other words, the equipment is what the lessor says it is). If you make the lease a “finance lease,” you may be able to avoid this promise. If this is the case, once the lessee accepts the equipment, it cannot later bring a lawsuit against the lessor, claiming that the goods are defective.

Illegal use of the equipment

If the lessee uses the equipment illegally, the government could confiscate it. Consider including a provision requiring that any use of the equipment be in compliance with all laws.

File for fixture filing

In some states, the lessor can file a “fixture filing” to protect its interest in equipment that is (or will become) a fixture (in other words, permanently attached to the land or other real property).

In other states, however, the lessor should get documentation from the landlord showing that the lessor’s interest in the equipment has top priority if the lessee defaults or at the end of the lease term.

Unless its equipment is or will become a fixture, the lessor is usually not required to file any lease documents with the state to protect its interests. However, it may be a good idea to make such filings to prevent the deal from being seen as a secured transaction.

Equipment warranties and disclaimers

The lease should disclaim all equipment warranties. Implied warranties can be avoided using expressions like “as is,” “with all faults,” or any similar language.

All disclaimers must be clear and prominent (capitalized, in bold type, or highlighted). To disclaim or change a warranty of merchantability, use language that refers specifically to merchantability.

Illinois court process

In Illinois, courts do not like disclaimers of implied warranties. These clauses are read in a way that does not favor sellers. In other words, if there is any way to read the provision to benefit the buyer, that’s how it will be read.

If you want to disclaim an implied warranty in Illinois, you should make this clear and prominent in your agreement.

Tax regulations

The equipment lease agreement prevents the lessee from changing or adding to the equipment without the lessor’s consent. Additions to equipment are considered income for the lessor, which can have immediate and significant tax implications. Talk to a tax professional if you have questions about how this regulation may affect you.

Signature requirements

Sign two copies of the lease agreement. One copy is kept with the lessor, and the other is given to the lessee.

Witness and notary’s presence

It’s a good idea to get the agreement witnessed or notarized. This will limit later challenges to the validity of a party’s signature.

Attorney help

If your agreement is complicated, contact an attorney to help you draft a document that meets your specific needs.

Key aspects of an equipment lease agreement

The following instructions will help you understand the terms of your lease agreement:

Introduction of parties

This section identifies the parties involved in the agreement and, if applicable, what type of entities they are.

In an equipment rental agreement, the party leasing the equipment is called the lessor, and the party renting it out is the lessee. You also need to write the date on which the document is effective (usually when it is signed).

Recitals

The “whereas” clauses, referred to as recitals, define the world of the agreement and offer key background information about the parties (i.e., the lessor and lessee).

In this agreement, this section includes a simple statement of the intent to lease the equipment. In other words, the lessor agrees to lease the equipment on certain conditions.

Description of the equipment

In this part, provide the full description of the equipment. For instance, you can include details like:

• The manufacturer’s name and year of manufacture (include any serial numbers that may be available.)
• Include any identifying features and additional specifications
• Ownership rights
• Requirements that the property must meet
• Information on any additional tools that may be required by the lessee

You must be comprehensive and clear when describing the equipment being leased.

Lease of equipment

This section acknowledges and accepts the lease of the equipment. It includes all the equipment, including any additional items that the receiving party leases from the lessor. The terms of the lease are applicable for all the equipment and tools taken on the lease.

Term

The time period during which the equipment is leased is called the “term.” Mention the agreed-on rental period here.

This period will start on the later of the following dates: the effective date or the date on which the lessee receives the equipment. If the equipment is received after the effective date, you must also clarify that.

At the end of the term, the lessee can renew the lease or return the equipment to the owner.

Additionally, the agreement gives the lessee the opportunity to buy the equipment at the end of the term. If you include such provisions, you must mention the conditions for purchasing the equipment.

Rental payments

In most agreements, each party is expected to do something. This obligation may be to perform a service, transfer property ownership, or pay money. In this case, the lessee gives the lessor money each month to pay for the right to use the equipment.

You’ve to write the amount that the lessee will pay as rent. The lessee also makes an advance payment (generally a month’s rent) to the lessor.

Security deposit

In this provision, the lessee agrees to pay a deposit to the lessor at the beginning of the lease to guarantee the condition of the equipment. Enter the amount to be paid. This money will be returned to the lessee at the end of the term if the equipment is still in good condition.

Ownership

States that the equipment is still the lessor’s personal property, even though the lessee has the right to use it for their business. There is no transfer of title to the equipment, even if it’s attached to or installed on the lessee’s property.

Lessee’s responsibility for care, use, and maintenance of equipment

The lessee must:

• Keep the equipment in good condition, and make any repairs and replacements at its own expense.
• Use the equipment carefully and properly.
• Make sure the equipment is used only by competent employees
• Keep the equipment at the agreed-upon location, and it shouldn’t be removed without the lessor’s prior written consent. This location will usually be the lessee’s place of business.
• Not change or upgrade the equipment. For example, this applies if you are leasing computers. The lessee will often need to make upgrades or changes in such instances. If such changes and upgrades are needed, mention them clearly.
• Inform the lessor about any loss, theft, or destruction of the property.
• Not assign or transfer the ownership rights of the equipment.

Lessor’s representations and warranties

The lessor’s promise about the property that is being leased. More specifically, the lessor is swearing that:

• It has the ability to lease the equipment but doesn’t claim that the equipment is guaranteed to be a certain way or useful to the lessee’s business.
• It will transfer any warranty that can be transferred (e.g., manufacturer’s warranty) to the lessee.

Lessee’s representations and warranties

The Lessee’s promise about the property that is being leased. More specifically, the lessee is swearing that:

• The equipment is in good condition, and they will maintain it properly.
• Use the equipment only for their business.
• If the equipment isn’t working after the effective date, it can only raise the issue with the manufacturer, seller, or installer (i.e., not the lessor).
• Any expenses incurred by the lessee to bring a warranty claim are not reimbursable. However, if the lessee receives any money under the warranty, it must turn it over to the lessor. The lessor will use the money to repair or replace the equipment.
• Even if the equipment supplier or manufacturer breaches a warranty or representation, the lessee still has to pay rent.
• Lessee promises not to violate any law by signing or performing its activities under the lease.

The lessor’s performance of the lessee’s obligations 

This section states that the lessor can pay or do anything it thinks is required if the lessee doesn’t keep insurance coverage, pay taxes or fees, or repair the equipment. If the lessor does this, the lessee must reimburse the lessor for its expenses and pay interest and legal fees for any amounts paid.

Insurance

During the term, the lessee must get insurance on the equipment and give a copy of any proof of that insurance to the lessor. The insurance should cover any loss or damage to the equipment and also any risk of harm to the general public by the equipment.

Even if the parties already have similar insurance, the policy required in this section will be the primary one. The lessee is allowed to change its coverage only after giving the lessor an advance notice.

Taxes and fees

This clause requires the lessee to pay all applicable taxes and fees during the term, and they should provide any relevant paperwork about these payments to the lessor.

Liability for loss and damage

This section states that the lessee has to pay for any loss or damage to the equipment. If the equipment is totally damaged or stolen, the lessee needs to pay for its repair or need to replace the equipment with a new one.

The lessee also needs to pay any outstanding fees, part of the cost of the item, and the total amount the lessor would have received as rent on that equipment during the term

Default

Lists the events that are considered “Events of Default” by the lessee. In other words, if the lessee does any of the things that are mentioned in the list, the lessor can walk away from the lease and demand payment or action as required under the lease. The next section explains what the lessor can do if the lessee defaults.

Rights of lessor on default

This section mentions the rights of the lessor when the lessee defaults. The lessor has the full right to end the lease and take back the equipment if they see any breach in the agreement. For instance, if the lessee doesn’t deliver the equipment at the end of the lease term, the lessor can go to the lessee’s property and retake it without having to get a court order or police assistance.

Interest

This section is to write down all the interest-related clauses.

For example, if the lessee is late on any of its payments, it will have to pay interest on the unpaid amounts until the payment is made. You need to provide the interest rate you want to levy from the lessee. The interest will start adding up on the date the payment is due.

Before you choose this rate, make sure you know what the legal limits are for interest rates in your state. If you select a rate that is too high, you may not get any interest at all.

Indemnity

This is an optional section explaining that the lessee will pay the lessor back for any costs the lessor incurs relating to the lessee’s use of the equipment.

Return of equipment

At the end of the term, the lessee must return the equipment at its own expense unless it renews the lease or buys the equipment.

Lessor’s right of inspection

In this section, the lessor is given the right to examine the equipment during normal business hours.

Successors and assigns

States that the parties’ rights and obligations will be passed on to successor organizations (if any) or other organizations to which rights and obligations may be permissibly assigned.

No implied waiver

Explains that even if one party allows the other to ignore or break an obligation under the lease, it does not mean that the party waives any future rights to require the other to fulfill those (or any other) obligations.

Option to renew

This provision gives the lessee the option to renew the lease at the end of the term. The terms pertaining to renewal will be decided after discussion with the involved parties.

Option to purchase

This section gives the lessee the option to buy the equipment.

• The lessee can buy the equipment at the end of the term at its fair market value if it performs all its responsibilities under the lease. If the lessee wants to do this, he or she needs to give written notice to the lessor before the end of the term.
• The “fair market value” of the equipment will be decided by both parties. It will be evaluated on the last day of the term.
• The lessee will pay the purchase price within a stipulated time period. Enter the number of days that the lessee has to make this payment.

Additional documents

This provision indicates that the lessee will fill out any additional documents that the lessor thinks are necessary to show that the lessor is still the owner of the equipment.

Notice

Lists the addresses to which all official or legal correspondence should be delivered. Provide a registered mail address for both the lessor and the lessee.

Governing law

Allows the parties to choose the state laws that will be used to interpret the document.

Counterparts; electronic signatures

This provision states that even if the parties sign the agreement in different locations or use electronic devices to transmit signatures (e.g., fax machines or computers), all of the separate pieces will be considered part of the same agreement. In a modern world where signing parties are often not in the same city—much less the same room—this provision ensures that business can be transacted efficiently without sacrificing the validity of the agreement as a whole.

Severability

Protects the terms of the lease as a whole, even if one part is later invalidated. For example, if a state law is passed prohibiting interest on unpaid rent, it will not undo the entire lease. Instead, only the section dealing with interest on unpaid rent would be invalidated, leaving the remainder of the lease enforceable.

Entire agreement

In this part, the parties agree to sign the equipment lease for the terms and conditions mentioned in the agreement. Unfortunately, including this provision will not prevent a party from arguing that other enforceable promises exist, but it will provide you some protection from these claims.

Headings

It states that the headings at the beginning of each section are meant to organize the document and should not be considered essential parts of the agreement. In other words, anyone looking at the lease should pay attention to the content of the clauses, not to the titles.

An equipment lease agreement or equipment rental agreement is really a long and exhaustive document with many legal clauses involved. Writing a rental agreement on your own is daunting and tiresome. Moreover, you should be careful not to make any errors that can lead to misrepresentation.

To prevent such experiences it is better to have an equipment lease agreement template as your key reference point. LegalZoom offers a professional and comprehensive lease agreement template that can be customized to suit your needs. You can pay a nominal fee and edit our template with the rich editor.

Frequently asked questions

What's an equipment lease agreement?

If your current equipment is damaged or needs repairing before you can use it, then you can upgrade your equipment with a new one—but maybe not buy it when you have the option to lease it.

An equipment lease agreement ensures the equipment owner and the renter know what's expected of them—and the equipment itself—during the duration of the lease and beyond.

What are the key elements required to draft an equipment lease agreement?

Leasing equipment can help keep businesses stay competitive without the upfront costs and commitments of purchasing.

To complete an equipment rental agreement you’ll need the following details:

• Who owns the equipment: Name and contact details of the owner of the equipment.
• Who's renting: Information about the renter who will take the equipment on rent.
• What happens when the lease is up: Know what options the renter has and what they must do when the lease term ends.
• Details about the equipment: Keep the details of the rented equipment, the model and serial number, and the manufacturer’s name.
• Lease payments: Provide details on how the rent will be paid, whether it will be periodic payments or one-time payments.