Drafting Equipment Leases: UCC Article 2A Compliance, Minimizing Risk Through Key Provisions and Clarity

Description

Leasing and financing are essential to large and small businesses so that they may acquire use or ownership of the capital equipment, related services, and other business solutions necessary to conduct business. Businesses acquiring these assets rely on rental companies, lessors and equipment financing providers to facilitate their acquisitions.

The 2008-2009 economic downturn motivated equipment users to seek alternatives to conventional financing. Having realized that leasing enables them to conserve available cash as well as borrowing capacity, they have elected to lease, rather than purchase, in progressively greater numbers. In fact, leased machines now outnumber owned machines on U.S. construction sites.

Leasing also enables users to avoid technological obsolescence and other ownership-related risks while retaining the flexibility to purchase the equipment or extend the lease in many cases. Most importantly, leasing enables users to match use requirements to financing requirements more efficiently by, among other things, allowing for duration flexibility. Thus, the total of the payments due under a lease may be considerably less than might be payable under a loan because: (1) the rent and other economic terms are likely to be “priced” to reflect the lessor’s reliance on the residual value of the equipment as well as certain federal tax benefits; and (2) the lease expiration date can be matched to the anticipated completion date of a construction project.

But equipment leasing and finance is a specialty practice, and counsel who understand the pertinent commercial law and market approaches will find it easier to evaluate the legalities and practical implications of the related transaction documents. For example, UCC Article 2A provides many advantages to lessors under a true “lease,” both as to certainty of payment by the lessee and preserving the lessor’s interest in the equipment. Counsel who understand the various provisions of UCC Article 2A will align the provisions of the lease documents to optimize the benefits afforded by those laws. Equipment leases can present unique issues. It is, therefore, vital that practitioners drafting such documents address all issues that may arise to prevent misunderstandings and reduce the likelihood of disputes.

Market practices regarding the various types of equipment finance transactions often dictate the allocation of risks and benefits in the related documents. The approach regarding the accepted allocation of these risks and benefits may differ depending on, among other things, the size of the transaction, the equipment type, and the customer’s anticipated use of the equipment. The anticipated accounting treatment and depreciation benefits under U.S. federal income tax law, must also be considered when structuring and documenting a lease transaction. In many cases, lessees prefer to rely on equipment lessors to also provide delivery, maintenance, servicing, parts support, software, and critically, financing solutions.

Listen as our veteran panel of equipment lease attorneys provides practical guidance regarding the considerations for counsel representing parties to equipment leases. The panel will provide their perspectives regarding structuring, analyzing and negotiating these transactions, and will focus on drafting strategies when documenting the essential provisions typically included in the related documents.