At the end of the initial equipment lease term, the lease contract may provide the customer with an option to purchase the equipment for a price determined by the leasing company. Sometimes the contract language reads that the equipment may be purchased for the “mutually agreed to fair market value based upon the Lessor’s Equipment Cost.” If there are fees added to the lessor’s cost, the fair market value calculations will include a portion of those fees. That’s a “gotcha.”
The “mutually agreed to” phrase means that the leasing company tells the customer what the fair market value is. If the customer does not agree to purchase the equipment for that price, the lease automatically renews. Usually the return option is no longer applicable because the customer did not provide the leasing company with the proper written end-of-lease notification. Thus, the customer lost the penalty-free equipment return option.
The automatic renewal usually adds 12 additional payments to the lease, and in really terrible leases renewals may be for another full lease term. The renewal creates cash flow problems and timely equipment replacement plans are out-the-window.
TIP: The key for the customer is to define the fair market value using an appraisal method in which the customer has a say in who the appraiser is, who pays for the appraiser and how the appraised value is defined. Both the leasing company and the customer can hire appraisers and the resulting purchase price will be the average of the two numbers.
See last week’s blog, “Leasing Term #189: Fair Market Value,” for how to use appraisals to negotiate the fair price.
REAL LIFE: One of our printing company clients was offered the mutually agreed to fair market value price on a used digital copier at the end of its lease. We did some internet research on the equipment value. We also contacted a used equipment dealer who provided us with a letter evaluating the used equipment resale price. We used this information to negotiate a $22,000 reduction in the end of lease fair market value purchase price for our client.