The end of lease period is one of the most critical parts of any lease agreement.
In a standard lease, there are often limited options available to you. However, most lessors are open to negotiation, so the most important thing is to plan in advance what you want to do with the leased assets, understand your notice requirements and notify the lessor of your intentions in plenty of time.
Pro-active lease management is vital here if you are going to enjoy the benefits of a competitive leasing arrangement. There are numerous options available, depending on your negotiation, lease type and the wording within your contract, but here are the more common options that leasing experts could help you arrange:
Return the Asset
As the term “end of lease” suggests, the standard and simplest option is to simply return the assets to the lessor and finish the lease with no further commitments.
There are some potential complexities and costs that can occur at the end of lease, but these can be easily avoided through pro-active lease management.
Check your notice period stated in the lease – this can be as little as one week or as much as 12 months. Whatever is written in the lease may be imposed by the lessor (however unreasonable) and if you miss it, you may end up with an unwanted extension at your lease’s primary rate.
Know your return conditions - the lease will contain details on the condition the asset is expected to be returned in. Whether it’s including original instruction booklets or under a specified amount of mileage, if it’s in the lease schedule, you are obligated to do so or pay the price.
It is not unusual, especially with large vehicles, to see lessors attempting to charge thousands in return charges. If a lessor has taken a competitive residual value position in the asset, it is reasonable for them to expect you to return the asset in good working condition, on time and at the stated return location.
Flexibility is key and good communication with the lessor is essential - it is difficult to re-negotiate existing obligations, so make sure you consult your leasing experts before you write a lease to negotiate an agreement with practical and competitive return conditions.
Asset Refresh During The Lease Term
You may be very happy with the conditions and processes of your lease and have built a comfortable agreement with your lessor. The only problem may be that the asset is too close to the end of its economic useful life and you need an upgrade.
Depending on your lease type and relationship with your lessor, you may have the option to upgrade your equipment and replace your current assets by starting a new lease agreement at a fair market value rate. Very similar to the way we upgrade our mobile phones, this option allows you to avoid technology obsolescence by creating an easy way of keeping your assets up-to-date.
Some versions of these asset refresh agreements may even cover the disposal of the current equipment for you, saving you money and ensuring correct, ethical disposal of the old assets.
You may find that when the lease term ends, you want to keep the assets or are not in a position to return them. Your best bet here is to ask for a lease extension. The first thing to do is to open discussions with lessors in plenty of time - check the notice period and don’t leave it until the last minute.
Lease type and the contractual options will dictate your strategy here: most finance leases (but by no means all) will have pre-stated extension options. Choose the most suitable one for your requirements and give plenty of notice to the lessor. Even with pre-stated options, doing nothing may lead to an automatic continuation of primary term rentals and can be needlessly expensive.
Under an operating lease there are likely to be no pre-stated secondary rentals and potentially no options to extend at all. That doesn’t mean you are unable to extend, it just means you need to be prepared for some negotiation with the lessor. If this is the case, check the notice provisions and make sure you’re ahead of the game by researching the fair market value of the asset.
Can I Buy/Sell The Equipment at the End of the Lease?
Hire purchase (a.k.a. lease purchase agreement) give you the option to buy (and therefore sell) the equipment once you have made the final payment. Under most other lease agreements, you will not have this option as the lessor retains title to the asset.
However, in some finance leases (especially in the UK) there should be a “sales agency” option written into the agreement. This means that once you have settled the lease, the lessee will have the option to sell the asset as an agent of the lessor and retain the vast majority (usually 95%+) of the sales proceeds. In simple terms, the lessee can sell the asset and keep most of the sales proceeds – although the process and invoicing can be somewhat complicated and usually a third party company will need to be involved.
Again this is an option to be discussed during lease inception and an area for the experts to help you with due to the potential contractual and tax issues associated with this approach.
Early Termination of the Lease
A lease is a long term commitment so any early termination will come at a price. The cost for any early termination will vary depending on lease type, but essentially you will need to pay to the lessor any remaining rentals to the end of the lease term plus any “broken funding” costs – which are typically not limited.
As the lessor is getting the asset back with a higher economic life than initially expected, there may be the chance for a discount, but these “rebates” may or may not be forthcoming and will require expert negotiation.
A standard lease will probably not allow its early termination by the lessee for “convenience”, but a well negotiated one will. Be sure to include them in new contracts and if you would like to challenge this provision for your existing leases, be prepared for a debate – it’s possible, but tough.
Ending a lease should and can be the simplest part of the leasing process, but it is reliant on your initial negotiation at lease inception. A competitive and optimal lease schedule requires foresight and industry knowledge. Make sure you utilise your in house lease experts, whose knowledge and experience will help you develop a practical and advantageous lease or you can outsource your new lease arrangement to third party leasing experts. If you chose the latter, be sure to look for an unbiased source, such as Innervision, who have no obligations to lessors and will therefore work in your best interests.
Once you have a strong lease, you need a system to manage and organise your active leases to ensure a smooth end of lease. Lease management software can help track your leases, store all the necessary lease data you require and notify you when you need to take action all in one place. This will help you make the most of your leases and avoid any unnecessary extensions or avoidable problems when it comes to deciding the next steps of your lease.
For more information on specialised lease management software, as well as Innervision’s own trialled, tested and trusted leasing software and services, download our Ultimate Guide Here.
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