An equipment lease agreement lets a company or person owning machinery, tools, or other items rent them to another party in exchange for regular payments. Depending on the industry, the anticipated usage, and the parties’ needs, equipment leases can be as short as a day or as long as multiple years.
This legal document protects the person who owns the equipment and the person renting the equipment by explaining each party’s responsibilities. It’s also advantageous to both parties, as it allows the owner to profit from the equipment they’ve purchased and lets the renter access complex or expensive equipment without buying it outright.
What Type of Equipment Can You Lease?
Equipment lease agreements can outline the terms and conditions for renting the following equipment types:
- Vehicles
- Power tools
- Medical equipment
- Heavy machinery
- Electronics
- Event equipment
- Furniture
- Appliances
- Gym equipment
Equipment Rental Tax Laws – By State
Each state has its own set of tax regulations regarding equipment rentals. Learning these laws is essential for owners and renters, enabling them to adhere to the relevant regulations and effectively plan for their tax responsibilities.
| State |
Equipment Rental Tax Rate |
Law/Website |
|---|---|---|
| Alabama | • 4%. | Ala. Admin. Code r. 810-6-5-.09 |
| Alaska | • 0% state sales tax. Some local municipalities may levy a tax on rentals. | Alaska State Assessor |
| Arizona | • 0%. | No sales tax for renting equipment. |
| Arkansas | • 6.5%. | Arkansas Economic Development Commission |
| California | • 7.5%. • Local jurisdictions may impose up to an additional 1% tax. • If the tangible personal property being rented out is in substantially the same form as when the lessor acquired it, and if the lessor has already paid use tax based on the purchase price or sales tax reimbursement, then no additional use or sales tax is due on the lease. |
California City & County Sales & Use Tax Rates and Sales and Use Tax Regulations |
How to Write an Equipment Lease Agreement
Step 1 – Gather Both Parties’ Contact Information
List each party involved in the lease, which can be a company or an individual:
- Lessor: The lessor is the equipment’s owner.
- Lessee: The lessee is the entity or individual renting equipment from the lessor.
This section clearly identifies both parties involved in the equipment rental agreement, ensuring they’re aware of each other’s roles, responsibilities, and contact information.
Step 2 – Establish the Lease Type
The most common types of equipment rental agreements are:
- Fixed Lease: A fixed lease starts on the agreed-upon date and ends on a predetermined date.
- Interval Lease: An interval lease starts on the agreed-upon date. It continues for set periods, such as each week, month, or quarter, until one party gives notice to terminate.
After you and the other party agree on a lease type, you can record the start date. If you settle on an interval lease, indicate how many days’ notice is required for termination.
Step 3 – Describe the Equipment
Provide a detailed description of the leased equipment, including the following information:
- Make and model
- Serial number
- Condition (new or used)
- Manufacture date
- Value
- Unique features, such as alterations or existing damage (if applicable)
This detailed description serves as a legal record, protecting both parties and preventing any confusion or swapping of the equipment.
Step 4 – Determine the Payments and Deposits
Choose Payment Methods
Agree on how the renter will make payments to the equipment owner. Possible options include:
- Cash
- Check
- Debit card
- Credit card
- Automatic draft
Rental Costs and Schedule
- Rental Costs: Clearly state the rental price for the equipment.
-
Payment Schedule: Decide if lease payments will be one-time or recurring.
- One-Time Payment: A single, nonrecurring payment for the rental period.
- Interval Payments: Regular payments the renter makes at agreed intervals, such as monthly or quarterly.
By clearly outlining the rental costs, payment schedule, and methods, both parties will have a shared understanding of the financial terms. Here are some additional costs that equipment lease contracts specify:
| Cost Item | Details |
|---|---|
| Late Payments | • Specify a reasonable late fee. • Decide whether the renter will have a grace period. • Review state laws for limits on late fees and grace periods. |
| Insufficient Funds | • Include a fee for payments with insufficient funds. • Confirm that the fee is reasonable. • Check state laws for limits on NSF charges. |
| Security Deposit | • Charge a security deposit to safeguard against a renter returning damaged equipment. • Detail the conditions under which you will return the security deposit. • The security deposit should only cover damage by the renter beyond normal wear and tear. |
| Use Tax | • Specify if a use tax applies. • The lessee may have to pay use tax if the lessor didn't pay sales tax when they purchased the item. • Consult state law for information on use taxes. |
Step 5 – Detail Lease Terms
Negotiate the following terms and note them in the equipment rental contract:
-
Delivery and Returns:
- Decide who handles delivery and when the lessee can report issues.
- Specify by what date the lessee must return the equipment when the lease ends.
-
Equipment Location:
- Explain where the lessee will keep the equipment during the lease.
-
Maintenance and Repairs:
- Determine who is responsible for regular maintenance and unexpected repairs.
- Decide if you will allow the lessee to alter or modify the equipment in any way.
- Allow yourself to conduct periodic inspections as the lessor (if desired).
-
Insurance and Tax:
- Establish procedures for handling equipment loss or damage.
- Include details on liability insurance and taxes.
- Specify if the lessee will cover additional costs, such as those for permits, taxes, and miscellaneous fees.
-
Warranty Period:
- Choose between one of the following:
- No warranties: The lessor will lease the equipment “as-is.”
- Limited warranty: The lessor warrants that the equipment is in good working condition when they lease it.
- Choose between one of the following:
-
Lease Cancellation:
- State the notice period required if the lessor wants to cancel the lease due to a violation.
- Clarify the notice period the lessee must give if they want to end the lease.
-
Subletting:
- Specify if the lessee can sublet the equipment.
- Clarify if they need to first acquire written permission from the lessor.
-
Option to Purchase and Renew:
- Clarify if the lessee has the option to purchase the equipment at the end of the lease.
- State the purchase price in advance.
- Decide if the lessee can renew the lease for another term.
-
Disputes:
- Choose a method for resolving disputes:
- Mediation: A neutral third party helps reach a nonbinding agreement.
- Arbitration: A neutral third party makes a final, binding decision.
- Mediation then Arbitration: The parties start with mediation and move to arbitration if needed.
- Choose a method for resolving disputes:
-
Additional Clauses:
- Add any additional clauses to the equipment rental agreement template.
- For example, the lessor may require the lessee to maintain the equipment’s identification markers to ensure they don’t confuse it with other assets.
Step 6 – Governing Law
Choose the state whose laws will apply if there is a dispute about the agreement.
Step 7 – Collect Signatures
Leave spaces for both parties to sign the contract to make it legally binding. Have them provide the date of signing.
Sample Equipment Lease Agreement
Download an equipment lease agreement template in PDF or Word format below:
