Property and Equipment Leases: What You Need to Know

There are many specialized types of property and equipment that are extremely useful but too costly for most to buy. Property and equipment leases can help organizations and individuals access these assets without having to purchase them. They can also allow companies that already own these assets to achieve an additional return on their investment. 

Property and equipment leases are common but complex contracts. If you want to make the most of a lease agreement, you should understand what they accomplish. 

A lease is a contract in which a party that owns certain property (the lessor) allows another party (the lessee) to use the property for a specified period in exchange for regular payments. Leasing and renting are the same process. A property lease is typically the leasing of real estate, while an equipment lease is the leasing of machines, vehicles, or other objects. 

For example, many people lease cars from auto dealerships. In these arrangements, the person renting the vehicle agrees to monthly payments for a period of several years to drive the car. At the end of the lease, they then return the car to the dealership. 

A lease can also include both real estate and equipment. For example, if a restaurant leases a space that includes a full kitchen, the lease will likely cover both the building property and the appliances within it. This is more efficient than writing separate leases for the two types of assets.

Leases are excellent ways for lessees to access equipment and property that they either can’t afford to buy outright or only need for a specific period. Meanwhile, leasing property allows lessors to make a regular income from assets that they aren’t using. 

You need a property or lease agreement whenever you’re permitting another party to use your property and expect payment in return. Reasons for lease agreements include:

• Finding a temporary space for a business
• Renting sports equipment to private individuals
• Permitting another party to perform activities on your property
• Accessing specialized equipment for construction.

These six elements are found in most property and equipment leases:

Leasing period

Leases last for a specified period that varies between industries. An equipment lease may only last a few weeks, while a property lease could last a decade or more. The leasing period states exactly how long the contract will last and when it will begin and end. 

Financial agreement

Leases typically involve periodic payments of a stated amount from the lessee to the lessor. The financial agreement will say when those payments are due and how much they are. It may also mention the total amount to be paid over the course of the lease. 

Tax responsibility

Some leases, especially property leases, will designate that the lessee is responsible for the taxes on the property for the duration of the contract. This must be included in the agreement, or the taxes on the equipment or property will remain the lessor’s responsibility.

Cancellation terms

Some leases will inevitably be canceled. The cancellation terms will designate how the lease can be canceled and the cancellation penalties. Many leases will specify different penalties depending on the cancellation conditions, such as whether the lessee or the lessor cancels and why. 

Renewal options

Many leases include instructions for renewing the lease in the contract. Many lease renewals offer beneficial terms to the lessee in exchange for maintaining the agreement. Including the renewal options in the lease clarifies exactly what those terms will be from the signing of the original contract.

Indemnity clause

Indemnity is protection against liability. Many leases include indemnity clauses to protect the lessor from liability for the lessee’s actions. These clauses assign liability for negligence to the lessee while the lessee is responsible for the property or equipment.

No contract is perfect. Property and equipment leases are no different. Even well-written leases don’t accomplish the following protections:

Complete protection against damaged property

If the lessee damages property or equipment while leasing it, the contract should require them to pay for the repair. However, many municipalities do not allow lessors to penalize the lessee for “normal” wear and tear. Furthermore, if the property is destroyed, the lessor still has to replace it, even if the lessee can’t pay the total costs. 

Guaranteed indemnity from illegal acts

While indemnity clauses protect the lessor from many kinds of losses, they don’t cover illegal acts. Suppose someone uses the leased equipment or property for illegal reasons, and it can be determined that the lessor reasonably could have been aware of the illegal usage. In that case, the lessor may be partially liable. 

In most cases, the lessor is the party to write a property or equipment lease. It’s your property, so you want to ensure that the lease is legally binding regarding financial agreements, cancellation penalties, and care expectations. You should understand the risks surrounding the lease in order to write a contract that, wherever possible, protects your business. 

Property and equipment leases need careful contract management, or they can quickly become points of contention. Many elements of leases are up for negotiation, from payments to the length to precisely what property and equipment are being leased. Performing this negotiation from scratch on every lease can quickly become time-consuming and lead to mistakes. 

Similarly, leases need to be monitored across their lifecycle. You must keep track of how much each lessee is expected to pay and when, as well as ensure that they are performing appropriate maintenance. That means you need to be able to track monthly events for every single lessee based on their contract. 

Furthermore, if a lessee has breached the contract in any way, you need to litigate that breach. This requires having all documentation regarding the lease at hand in a way that’s easy to reference. If your Legal team is responsible for more than a few leases, the entire management process can become a significant time drain. 

One reason that property and equipment leases become so challenging to manage is that elements of the contract are fragmented across different systems. After a lease is written, it’s common for the actual agreement to be stored in one location, the payment schedule in a second, and the plan for maintenance checks in a third. None of these systems typically talk to each other, and there’s no one place to examine everything about a given lease. There’s no transparency in the process. 

The management process can be simplified, though. By using digital contract management, you can streamline your leasing process and handle everything from negotiation to litigation with fewer hiccups. 

Digital contract lifecycle management (CLM) solutions allow you to store everything in one place. Instead of fragmenting the contract, everyone involved checks the same system and can see everything at a glance. The CLM offers a single source of truth, providing complete transparency. Nothing can slip between the cracks and get lost. 

You can help your Legal department take the next step to simplify your leasing process by implementing templatable workflows. After all, every property and equipment lease should follow the same workflow. A templated workflow allows you to design and implement an easy-to-follow process for each lease you offer. 

When you’ve added a templatable workflow to your leases, managing everything about those contracts becomes easier. Generating new leases is as simple as using the template to create a new contract. From there, you can assign signers and approvers and even adjust conditional clauses like renewal policies based on the requests of the lessee. There’s never any doubt about the next step in your leasing process. Your Legal team can focus on the actual negotiations instead of writing new contracts from scratch. 

Ironclad’s Workflow Designer is the perfect tool to implement templatable workflows for your leases. It’s easy to drag-and-drop elements into a template, letting you create effective workflows in minutes. Your Legal team can collaborate on the workflow design process to ensure that the process is correct from the beginning. 

Once you’ve implemented the workflow, Ironclad continues to support your leases. Everyone involved in a contract can monitor its status. Furthermore, since it’s entirely digital, there are no delays caused by mailing documents back and forth. The workflow keeps the process moving. A lease can even be signed the same day it was requested. 

Property and contract leases are helpful for both lessors and lessees. They allow you to bring in revenue from assets while helping others access them. You can make the lease management process simpler by using the right tools. Learn more today about how implementing Ironclad’s CLM can help you streamline leases and save time.