Notice Period: A Key Term of Equipment Leases
Unless they are traditional capital “rent-to-own” leases, equipment lease agreements usually contain considerable risk for lessees. Identifying these risks and minimizing them through negotiations and operating adjustments are essential elements of an efficient enterprise-wide equipment leasing program.
One of the potentially most-damaging risks that enterprises should be wary of is the language surrounding the notice periods of the lease.
Notice Period Provisions
Equipment finance companies typically include requirements for lessees to provide notice at various points throughout the lease, or else face additional costs.
Without attention to the notice issue during negotiations, lease agreements often include notice-related language that is unreasonably stringent. Events that occur during normal operations — such as moving, repairing, or modifying equipment — can require prior written notice and approval from the lessor. This in itself makes sense; it is, after all, still the lessor’s equipment.
The problem occurs when the events that require notice are so commonplace that the requirement to provide notice becomes a burden and is easily overlooked and can trigger such outcomes as default. It’s one thing to have to report a major repair, for example, but having to report a laptop has left the companies headquarters is overly burdensome and increases the probability of non-compliance.
Lessors can make the likelihood of non-compliance even greater by:
- Restricting the allowable notice period to such a tight time frame that lessees will find it extremely difficult to submit the notice in the required window.
- Requiring a specific notice form to be filled out and submitted—often to a different address than payments are sent, and with a specific manner of delivery (e.g., certified mail only).
- Scheduling the required notice period for an illogical time.
When the notice period for leases are hard or impossible to meet, it can lead to penalties, additional costs, and loss of leverage. The best way to avoid this risk is to be aware of it from the outset and to negotiate language that caps the lessee’s risk exposure regarding notices.
Another best practice when negotiating leases is to require the lessor to provide a notice to the lessee some period of time prior to the notice being due to the lessor. This “notice for notice” requirement puts the onus on the lessor, although of course the lessee still has to take action when it receives this alert. The lessor should also be required to give the lessee written notice if there has been an event which they feel will trigger default with a reasonable cure period.
Notice also figures prominently in lessee risk at the end of a lease. Lease agreements typically require the lessee to provide notice regarding its plans for equipment disposition once the lease expires.
Here, too, lease agreements often include overly restrictive notice provisions, including narrow “notice windows” such as “not more than 180 days but not less than 90 days prior to end of lease.”
Failure to meet the notice period requirements can invalidate “$1 out” options and other options that provide lessees with flexibility at the end of the lease. If a notice period is missed relative to end-of-lease options, the lessee loses leverage in negotiations on issues such as the fair market value of the equipment.
For this reason, it’s especially critical for lessees to negotiate lease agreement language that mandates that lessors provide a reasonable notice of actions that the lessee will need to take regarding its intentions for the equipment.
Lessees need to be aware that seemingly innocuous provisions regarding notices can actually significantly favor lessors, leading to additional cost and the potential loss of end-of-lease flexibility.