Marks & Associates, P.C. 
November 2014
In This Issue
Firm News
Kickoffs and Endgames
Know the Equipment and Vendor
Legal Check Up: Document & Policy Manual
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....and Away we Go


The fourth quarter is now in full swing and, as usual, things are heating up hereabouts. We are seeing a lot more interest in bank leasing (see article in this issue) but also on the part of vendor and independent leasing companies who are either starting up or upgrading their operations.


Busy as things may be, here is a not-so-subtle reminder that taking time during the Thanksgiving or Christmas holiday to look over your documents and procedures may be the best investment of time you make this year. No one says you have to don green eye shades and put on classical music to look over what is in your lease and see if any of it surprises you. The sort of review we are suggesting can be completed while the annual football spectacle rages or Uncle Fred complains about the dressing.


Here's wishing you and yours a safe and happy Thanksgiving and busy and prosperous end-of-year.





As with many things, the worst problems plaguing most lessors occur either at the beginning or the end of the lease term.  


As to the beginning, it is surprising how many leases contain language regarding the commencement of the term that is inconsistent with the lessor's practices. Many lessors rely on computer programs to provide pricing and fill-in rent and other important data without first checking to ensure that the language of their form documents comports with these computer runs.


For example, if the rent is to be paid on the first day of the month, it is essential that the lease provide for either interim rent or some other means of providing for the discrepancy between the delivery and acceptance of the equipment and the first rent payment date.  


Similarly, where the lessee has been quoted a 36-month lease, the document should either make it clear that the interim rent is paid in addition to the 36-month lease payments and that the term extends to the last day of the 36th month or that the term ends during the final month. There are many variations on these themes but the language must be clear...and too often is not.  


It is also surprising how many leases state that the term commences on the first day of the first month following acceptance of the equipment. This could be read to mean that the lessee's obligations with respect to maintaining and ensuring the equipment do not commence for several days after the equipment comes into the lessee's possession. In fact, stating that certain of the lessee's obligations commence when the equipment is delivered may be necessary in order to provide the protection the lessor expects.  


Yes, we have seen situations where the equipment is damaged after delivery but prior to acceptance or after acceptance and prior to the "commencement date" of the lease.  


There is even more confusion in many leases regarding what happens at the end of the term. Is the document clear that the failure to return equipment is an immediate Event of Default and is not subject to a 30-day cure period? If the lessee does not return the equipment in the condition required by the lease, is the lessee obligated to pay the full rental amount during the holdover period? Does it lose its right to exercise upgrade, purchase or renewal options? If the lease provides that the term renews or extends terms during the holdover period, is the lessor unable to recover the equipment so long as the lessee continues to make monthly payments, essentially turning the lease into a month-to-month obligation for an unlimited term at the lessee's option?  


Where equipment must be de-installed, inspected, certified or otherwise dealt with at the end of the term, is the lease clear as to whether these activities must take place prior to the last day of the lease term or as an additional period tacked on the end, essentially extending the lease without rental payment?


On a controversial subject, some have called for lessor's to give end-of-term notices to lessees wherever automatic renewal or evergreen provisions might apply. If the lessor elects to do so, it should be certain that its computer tracking system will alert it to this "obligation".  


If the lessee is obligated to give notice to the lessor, the lessor's practice should match its expectations and, in today's litigious environment, the lessor would be well advised to be prepared to defend the practice. Lessors doing business in New York, Louisiana, Wisconsin, and Rhode Island should be familiar with state laws on automatic renewals.  


Finally, and most important, lessors should remember that there is no "right" or "wrong" way to address most of these issues, either ethically or financially. The advice is simple: know what you want your lease to say and be sure it does.





We understand that risk is inherent in equipment finance.  If you are too conservative, you will starve for lack of business.  To get the next deal you may need to push the boundaries of your company's experience in market area, equipment type, financing structure, deal size and known business partners. However, doing your homework on the equipment and vendor can reduce the risk of a substantial economic loss in the event of a default.




When you finance a type of equipment that you have never financed before, educate yourself about how the equipment is valued, its economic life, secondary market for the equipment, risks of the technology and the danger of the equipment to others. These issues will impact the structure and term of the deal.


Know the value of the equipment. We are not recommending an appraisal all of the time. Consult industry resources and experts to determine if the equipment cost on the invoice is in the right ballpark. This will help to avoid being significantly "under water" on the equipment and may help to avoid fraud. For example, a vendor can inflate the equipment price to give a kick-back to a customer or simply charge such a high price for the equipment that the deal does not make sense for the financing company.


Know the economic life of the equipment. The equipment may have a significantly shorter (or longer) life than equipment you have financed before. The State of Alabama may consider 20 year bonds to pay for computer tablets for students; but in our industry you cannot accept such a difference between the lease term and asset life.


Recognize when the equipment will have little or no value if repossessed. The equipment may be manufactured to meet the very specific needs of your customer or a small specialized market. It may be installed where you would have to tear out a wall to remove the equipment. It may be a type of equipment that people simply do not buy used. Rapid technological changes in an industry quickly make the equipment obsolete. 

Know the dangers and risks associated with the equipment. If it is a type of equipment that could kill or injure someone, you may require more liability insurance than you would for typical equipment. If the equipment could carry or produce hazardous materials you will need to address the limits on its use and include special indemnity provisions in your lease documents. You may also elect to only finance the equipment though an Equipment Finance Agreement rather than a true lease so that your leasing company will be less likely to be sued in the event of an accident.


Know the maintenance needs of the equipment. If ongoing maintenance is important to the value and functionality of the equipment you may need to set out particular maintenance and return conditions in the lease. You may elect to require that the lessee have a maintenance contract with an approved provider and that the lessee keep a maintenance history log.




Even though it is not always possible to know a lot about the vendor, it is best to deal with established reputable vendors. Keep in mind, if you do not have a program agreement with the vendor, the vendor may have little, if any, duty to your company in a transaction.


Two examples:  


One leasing company paid a vendor invoice for equipment that required customization for use by the lessee. The lessee never provided the required specs to the vendor. Rather than refund the money to the lessor the vendor applied the lease proceeds to other debt owned by the lessee. The lessee later bankrupted.  


A client financed vehicles for a vendor's customers. The borrowers had questionable credit but the deals looked good because the vendor provided copies of checks from the customers showing significant down payments. Unfortunately, the down payment checks were bogus. The vendor had the customer make out the checks but never cashed them. Most of these risky borrowers quickly defaulted.  


If you are dealing with an unknown vendor you may want to have a third party conduct an inspection of the financed equipment. However, keep in mind that even experienced inspectors can be fooled, for example, by fake serial numbers on equipment.  


Sure, you can sue unscrupulous vendors. But who wants to spend their time chasing bad vendors when you could be chasing the next deal?  


Remember This:

Equipment finance is essentially asset-based lending, focusing on the collateral as well as the borrower/lessee's credit. In that vein, be sure you understand your collateral before you lend against it and you will save your lawyer headaches and yourself money.   





Pop Quiz! Do you know what your Lease or EFA and internal policies say about:

  1. Cross defaults? Does a default under a schedule, another agreement or agreement elsewhere for money borrowed trigger a default under your documents?
  2. Late Fees? How do your late fees get calculated and do the grace periods under your documents allow the lessee/borrower to pay late each pay period?
  3. OFAC? If you are wondering what OFAC is, you should have been reading our prior newsletters, but we will be more than happy to get you up to speed. If so, do your documents have representations and warranties addressing anti-terrorism, money laundering, etc.? After, are you checking the OFAC list for compliance purposes?
  4. UCC-1 Filings? Do you use trade names or d/b/a for your UCC-1 filings? If so, stop now and pray! If not, are you checking the exact legal name of your lessee/borrower for the UCC-1 filing as compared to a recent Certificate of Good Standing for the exact legal name (including punctuation), for the borrower/lessee?
  5. Representations and warranties? Do your documents have "continuing" or "true as of the date when made" representations and warranties? If you are relying upon continuing representations to trigger a default, check your document! Make it sure it is a default as well when a representation or warranty is breached.
  6. Change of Control? Do your documents protect you for change of control events, such as merger? Do they mention voting rights, ownership and membership interests, ability to control etc.?
  7. Name Change? Does your lessee/borrower have to notify or seek your permission prior to changing its state of organization or legal name? Your UCC-1 is only valid for usually only valid for four months after such change if you are relying upon a grant for after acquired property.
  8. Is "time of the essence?" Do your documents state that time is of the essence with regards to all lessee/borrower obligations?
  9. Five Year Updates? Are you calendaring reminders with regards to filing continuation statements on appropriate deals so as to not lose your priority status?
  10. Insurance? Are you checking certificates so that you are listed as "loss payee" on the physical damage policy and "additional insured" on the liability policy? If not, you may not be as protected as you once thought.
  11. Without paying any attention to possible automatic renewal situations, does your lease document contain provisions for "holdover rent?"

Marks & Associates, P.C.
505 North 20th Street
Financial Center - Suite 1615
Birmingham, AL 35203
(205) 251-8301
P.O. Box 11386
Birmingham, AL 35202

All articles written and submitted by:
      • Barry S. Marks - 205.251.8303  -
      • William L. Phillips, III - 205.251.8306 -
      • Matthew D. Evans - 205.251.8302 -

Nothing in this newsletter constitutes legal advice or is intended as a substitute for consultation with a qualified lawyer, accountant or other professional.