Lease Myth Busting: “We designed our own Master Lease and therefore our leases have minimum risk.”
With a few very notable exceptions – every Lessee-defined lease document deal we have reviewed had at least these 3 characteristics in common:
- Lessees spend significant time developing their own master lease and very little time developing a schedule document.
- The documents often contain “standard” language which could have been made significantly stronger to reduce risk
- The documents are almost never signed without material changes demanded by lessors. These changes reintroduce many of the risks that the entire exercise of developing the document was intended to eliminate.
In addition, many lessors will sign a company’s proposed Master Lease document without many changes but since the schedule is the governing document in case of conflict of terms – the lessor will insert their own schedule which contains the definitions and triggers which create risk for the lessee and drive the lessor’s profit.
Example: The following section was inserted into a standard lease doc created by a company at the request of the lessor. On its face it seems like a common sense addition which triggers Default if the Lessee fails to fulfill any obligations under the lease. Since the Lessee has every intention of fulfilling its obligations this seems reasonable.
“The failure of Lessee to perform any other term, covenant or condition of this Lease Agreement, any Lease Schedule or any other document, agreement or instrument executed pursuant hereto or in connection herewith which is not cured within ten (10) days;”
However the definition of what triggers a default is very broad – any mistake such as an incorrect payment – if not cured with 10 days could create a default scenario. More importantly notice is not mentioned or defined. So the lessee could be unaware that a default event which triggers default has taken place. Also the default remedies amended at the request of the lessor in the schedule document created an exposure as follows:
“Pursue and enforce, alternatively, successively and/or concurrently…:”
- Accrued and unpaid Lease charges due and owing
- Lease Charges as and when becoming due
- Accelerate all Lease Charges and other amounts due and/or likely to become due from the date of default to the end of the lease term using a discount rate of five percent (5%)
- Retake possession of the equipment without terminating the Lease Schedule
- Require Lessee to deliver the Equipment
- Pursue any other remedy
Conclusion: Developing company “private label” Master Leases and Schedule documents, unless executed flawlessly, usually winds up being a fruitless exercise. A better approach is to define the key areas of potential risk in a lease document and negotiate with vendors to reduce those risks. The Devil is in the details.