An equipment lease agreement allows a person or company owning tools, machinery, or other objects to rent those items to another party. Equipment leases can be as short as a day or as long as multiple years, depending on the contract and the needs of both parties. These agreements are also known as:
- Equipment rental contracts
- Equipment rental agreements
An equipment lease agreement protects the person who owns the equipment (the lessor) and the person renting the equipment (the lessee) by explaining each party’s responsibilities. If you want to lease real estate, you should use a land or commercial lease agreement.
What Is an Equipment Lease?
An equipment lease is a contract in which the owner agrees to let someone else use that equipment in exchange for regular payments. Depending on the industry, those payments may be made daily, weekly, monthly, or annually.
Lease agreements allow the lessor (the equipment owner) to profit from their property. Meanwhile, they allow the lessee (the equipment renter) to use the equipment without buying it outright. This arrangement makes equipment leases popular in many industries where equipment is expensive or only occasionally necessary.
Industries in which equipment leases are common include:
- Manufacturing (for specialized equipment like machining tools and plasma cutters)
- Transportation (for items like semi-truck chassis and moving vans)
- Construction (for heavy machineries like bulldozers and cranes)
- Restaurants (for appliances and catering equipment)
- Healthcare (for large equipment like power wheelchairs and x-ray machines)
- Recreation (for gear like snowshoes or four-wheelers near hiking trails)
How Does an Equipment Lease Work?
Equipment leases typically have regular payment schedules, and the lessee agrees to pay a specific amount consistently in return for using the equipment. The particular schedule and amount of the lease payments will depend on the equipment and industry. Leases may also include interest. In many cases, late charges by the lessee will accrue interest daily or weekly until the late payment is finally made.
An example equipment leasing situation is an agreement between a lessor and a lessee in the restaurant industry. As an experiment, a restaurant may want to lease a professional-quality espresso machine from a restaurant supply company to complement their breakfast service. The lease allows the business to test having the espresso machine without spending thousands of dollars on equipment. The regular payments may cost the same as loan payments, but since there’s no need for a downpayment, it’s still less expensive for the lessee.
How to Write an Equipment Lease
The lessor usually writes equipment lease contracts. To write an equipment lease agreement, you need to understand how you want your equipment to be handled. Here’s how to write an equipment lease that works:
Step 1 – Gather Both Parties’ Contact Information
Start the contract with a section explaining who the lessor and lessee are. The lessor is the equipment owner, and the lessee is the individual renting the equipment from the lessor. You should specify whether either party is a company or an individual.
You may also list each party’s contact information for additional specificity.
Step 2 – Establish the Lease Type
When describing the type of lease, you can either have a fixed lease or a lease on an interval basis.
A fixed lease means the lease will become effective on the start date and terminate on the end date. If you choose for the equipment to be leased on an interval basis, the lease will begin on the start date and for the agreed-upon intervals, such as a full calendar month or full quarter, and will continue until either party gives advanced notice to terminate the relationship.
Once you have figured out the kind of lease you’d like, write down when the lease will become effective and how many days notice is required before either party can terminate the lease.
Step 3 – Describe the Equipment
You should describe the equipment in detail, including identifiable features like serial numbers and unique physical qualities such as alterations or existing damage. Describing the equipment protects both parties by acting as a legal record of the gear they have agreed to lease. A thorough description of the equipment can also prevent swaps.
Step 4 – Determine the Payments and Deposits
The charges and deposit may change depending on the equipment you’re leasing. Clearly explain the rental costs and schedule, along with any deposits.
In terms of schedules, you can either make one-time payments or payments at intervals. A one-time payment is a single, nonrecurring payment transaction where the entire amount is rendered. Interval payments are payment transactions occurring repeatedly and periodically, as agreed upon in the parties’ payment schedule.
Provide a method of payment both parties can agree to. For example:
- Debit card
- Credit card
- Automatic draft
To ensure payments are made on time, the lessor can ask for a reasonable fee if the Lessee fails to make a payment when it is due. A grace period is provided so the Lessee can pay without penalty. You must check your state laws for any limitation on the grace period and how much you can charge for late payment.
On top of late payment fees, the Lessor can also include a charge against the Lessee for any payment with insufficient funds in the Lease. The amount should be reasonable to help compensate the Lessor for any inconvenience from the delay. You should check your state laws for any limitations on how much you can charge for payments with insufficient funds.
A security deposit for the equipment lease may be helpful in these situations:
- The lessee may return the leased equipment in a damaged condition.
- The total amount owed will not be determined until the equipment is returned. In this case, the security deposit can serve as a way to collect a significant portion of the lease payment.
Finally, specify whether a use tax will be associated with the equipment. Use taxes are functionally equivalent to sales taxes and are imposed on tangible property brought from one jurisdiction into another. A use tax discourages out-of-state purchases made to avoid sales taxes. You should consult state law for further information on whether you should include a use tax in your equipment lease.
Step 5 – Detail Lease Terms
You should negotiate terms about the following:
Delivery & Returns
Establish who is responsible for delivery, when the lessee can report discrepancies, and when the lessee should return the equipment after the lease has ended.
Location of equipment
You can specify where the equipment will be located during the lease.
Maintenance and Repairs
Establish who will be responsible for the maintenance of the equipment, whether alterations to the equipment are allowed, and whether the lessor can inspect the equipment at any point during the lease.
Insurance and Tax
Decide who is responsible for getting loss or damage insurance for the equipment. You can also include information about liability insurance and taxes.
Liability insurance covers damage you caused to someone else’s property. This type of insurance also covers damages caused by anyone else using the property.
Both parties may agree that the Lessee will be responsible for additional costs. For instance, the Lessor wishes to pass the cost of personal property tax assumed against the property through to the Lessee. Other possible expenses include registration fees, taxes, licensing fees, and permits. Check your state laws and industry regulations to ensure that taxes and fees are handled appropriately.
Warranty provisions are typically included in an equipment lease. If you select Yes, the contract will contain a provision stating either:
- No warranties: the lessor makes no warranty on the equipment; the equipment is leased “as is” without any promises about its condition. In other words, the Lessee accepts the property at their own risk (Lessee beware).
- Limited warranty: the lessor only warrants the equipment in good working condition and no other implied warranties.
If the lessee violates the terms of the agreement, provide the number of days’ notice the lessor must give before they can cancel the lease.
Specify whether the lessee will be allowed to sublet the equipment and if written permission from the lessor is required first.
Option to Purchase and Renew
Under certain circumstances, the lessee may wish to purchase the equipment when the lease terminates. For instance, the lessee had wished to try the equipment before buying it, or the Lessee did not have the resources to make a purchase. Both parties can decide on the purchase price in advance, allowing the lessee to use the equipment first without purchasing it.
Providing the Lessee is not in violation of any terms during the original lease, in some situations, both parties may agree to enter an additional lease term upon the conclusion of the original lease.
You have three dispute options: meditation, arbitration, or mediation then arbitration.
Mediation is when a mediator, a neutral third party selected by the parties, tries to facilitate a compromise and agreement. The decision by the mediator is nonbinding.
Arbitration is when an arbitrator, a neutral third party selected by the parties, evaluates the dispute and determines a settlement. The decision by the arbitrator is final and binding.
Mediation then arbitration is when you want to enjoy the benefits of mediation and arbitration. Mediation and arbitration (known as med-arb) let the parties attempt to collaborate on an agreement with the help of a mediator and arbitrator. If they can’t conclude, they will then move on to arbitration. If qualified, the mediator can assume the role of the arbitrator and give the parties a binding decision quickly, or the case can be passed on to an arbitrator who’s had the chance to consult with the mediator.
If there are further terms you would like to include in the agreement, you can mention them as additional clauses.
Step 6 – Governing Law
Choose the state whose laws will determine how the agreement is interpreted in the event of a dispute.
Step 7 – Collect Signatures
Finally, include a field where both parties can sign and date the contract to make it legally binding.
You can start with our in-depth free equipment lease template if you’re ready to write an equipment lease agreement. Our form builder can help you customize the equipment lease agreement template into a contract that fits your needs.
What to Include in an Equipment Lease
Every equipment lease should include the following fundamental contract elements:
- Lessor: The equipment owner who will be renting out the equipment
- Lessee: The renter who will be paying for the privilege to use the gear
- Term: The length of time the lessee will lease the equipment. Lease terms are commonly set with a specific start and end date, but you can also list a period of weeks, months, or years.
- Equipment: The equipment that’s being rented. Many leases cover more than one piece of equipment. So this section can become long, depending on your circumstances.
- Rent: The amount of money the lessee agrees to pay the lessor for using the equipment. The rent section should also designate how often the lessee must pay rent and when the rental payment will be considered late.
- Deposit: Many leases require the lessee to pay a deposit for the equipment. This money is intended to cover repairs or replacement of the equipment if the lessee should damage it. Deposits may be refunded at the end of the lease, applied to the final payment, or kept, depending on the contract.
- Equipment Use Details: The lessee must follow the rules while using the equipment. These rules protect the lessor’s investment in the equipment by requiring the lessee to use it in designated, safe ways. For example, an espresso machine lease might require the lessee to use it only on-premises and perform specific maintenance to keep it in good condition.
- Delivery: How the lessee will take possession of the leased gear. Depending on the contract, the lessee may need to pick it up, or the lessor may deliver it.
- Defaults: The penalties for breaking the terms of the contract. This section can cover everything from the lessee breaking the equipment rental contract early to the penalties for damaging the gear.
Tips for Writing an Equipment Lease
- Do your research before writing or signing a lease. Every industry’s leasing standards and concerns are a bit different. Before you write or sign your first equipment lease, research what other leasing companies in your field include in their contracts. Learn the standard lease periods, rates, and terms and conditions.
This research will help you understand whether the lease you’ve written is fair and help you determine whether you’re leaving out any necessary elements for your field.
- Consider maintenance. Equipment typically needs to be maintained to remain in good condition. While short-term leases of just a few days or weeks may not leave equipment requiring significant maintenance, longer leases probably will.
Any equipment lease can benefit from a clause explaining the maintenance expectations for the gear. Explain who’s responsible for equipment upkeep and how it should be performed. If the lessee is responsible, what do they need to do? If the lessor is responsible, how should they schedule it with the lessee? Answer these questions in the initial contract to prevent problems later.
- Consider insurance. Most leases require deposits to cover repairs, but you can proceed. Lessors can require lessees to have the leased equipment insured for the duration of the contract. This arrangement adds extra costs to the agreement but can allow the lessor to request a lower deposit upfront. A good insurance policy will cover any repairs and replacements necessary and protect both parties from liability if the equipment is involved in an accident.
- Consider renewals. Many leases are designed to be temporary, but not all. Some leases are written to be renewed indefinitely or until the lessee cancels the contract. This kind of agreement is helpful for equipment rentals that may not have a set end date.
Even if you don’t want to set up a lease that renews automatically, you can still include a renewal clause in the contract. This clause specifies how the lessee can renew the agreement and any differences between the initial and renewal contracts. Many renewal clauses will cover details like whether the deposit carries over and any inspections needed before the renewal takes place.
If you’re ready to write your equipment lease agreement, download our template or visit our form builder to get started.
Sample Equipment Lease
Below is a sample equipment lease agreement.