The equipment leasing and finance community is very familiar with identifying some of the more critical provisions of a lease (or loan, where applicable), as well as the document deliverables that are essential to obtain from a customer in any transaction. For example, lessors are strongly encouraged never to waive a hell or high-water provision, the limitation of liability disclaimer, and various other standard provisions. Nevertheless, every lessor has been asked at some point during the lease negotiation process to waive an important deliverable or clause in a lease.    

This article is intended to provide perspective from a different vantage point, i.e., identifying deliverables or provisions that a lessor might reasonably consider waiving, as well as alternative options that may help limit a lessor’s risk under the appropriate circumstances. While certainly not exhaustive, this article identifies three illustrative examples, the potential risks associated with waiver or alternatives, and some practical tips in navigating those options.  

Prior to contemplating waivers or alternatives for any of the examples discussed in this article, every lessor must first consider: (i) the dollar amount of the associated transaction; (ii) the creditworthiness of the customer; and (iii) the strength of the relationship between the lessor and the equipment vendor. These considerations are essential in determining whether any concession on the part of the lessor is appropriate under the circumstances. 

Landlord Waivers   

A lessor often seeks a landlord waiver on a transaction when its leased equipment will be located on real estate that a lessee, as tenant, rents from a landlord. However, landlords increasingly present challenging counterproposals, including demands for rent on the leased premises in exchange for equipment repossession, or requiring the lessor to relinquish its rights in the equipment if not repossessed within a given time frame. 

A lessor, however, should consider the associated risks prior to agreeing to any such counterproposals. If a landlord demands a lessor assume responsibility for any rent on the leased premises upon a tenant default thereunder, a lessor may run the risk that, depending on collateral type, such rent obligations could exceed any recovery on the collateral.  This can come either in the form of past due rent on the premises and/or future rent to be paid for each day that the equipment remains on the premises prior to the lessor’s repossession. 

While a lessor may envision a reasonable amount of time that it would take for it to repossess its collateral, there may be extenuating circumstances that could materially extend that time. For example, a lessee bankruptcy may delay a lessor’s ability to access its equipment. Specifically, a lessor may be precluded from timely repossessing its equipment by virtue of a bankruptcy stay, during which time the amount of rent may continue to accrue and/or the time frame within which the lessor was required to retrieve the equipment may contractually expire under the landlord waiver. 

In such circumstances, a lessor can consider certain potential risk-mitigating strategies, including: (i) providing a tolling period in the event of a bankruptcy filing or other event outside of lessor’s control that would otherwise prevent lessor from timely removing its equipment from the premises; or (ii) negotiating for the lessee to maintain a reserve account with additional funds to cover the lessor’s potential exposure. However, depending on the circumstances and the landlord’s willingness to fairly negotiate, a lessor may benefit from waiving the landlord waiver requirement altogether rather than entering into an agreement with the landlord that could potentially put the lessor in a less favorable position.

Governing Law and Jurisdiction

Most well written lease agreements contain a choice of law and forum selection clause that align with the lessor’s home state. After all, the lessor is performing its obligations in its home state and should be entitled to the benefits and predictability associated with the laws of its jurisdiction. Selecting a governing law and forum selection of its choice can certainly provide a lessor with a strategic advantage in the event of litigation. 

However, customers often request during the negotiation process that the laws and venue of their home jurisdiction apply, or that of the jurisdiction where the equipment is to be located.

Leasing companies can consider modifying the choice of law and forum selection clause to the customer’s requested state but, before doing so, they should consider a few key items, including (i) whether the customer’s requested state has any laws that could negatively impact the transaction or enforcement of the lease; (ii) having outside counsel readily available in such other state; and (iii) whether it is going to get “hometowned” in the lessee’s home jurisdiction. Even if not in its home state, the lessor can still have an efficient process set up with outside counsel for enforcing its lease agreements in that jurisdiction. In such cases, depending on the circumstances, the lessor can consider further providing in its lease that such jurisdiction be non-exclusive and that lessor retains the right to bring an action in any court of competent jurisdiction. 

Delivery and Acceptance Certificates

Ideally, a leasing company will receive a separate signed delivery and acceptance certificate (D&A) from its lessee following delivery of the equipment, which triggers the hell or high-water treatment under Article 2A of the Uniform Commercial Code. However, what if a vendor or a lessee does not want a separate D&A? 

There are several options that a lessor can consider instead of obtaining a separate D&A at lease commencement. One option is to include a “deemed acceptance” provision in the lease providing that if the lessee has not expressly notified the lessor of any issues with the equipment within a certain limited number of days after lease commencement, the equipment shall be deemed accepted by the lessee for all intents and purposes under the lease. To mitigate risk, a lessor should have a program agreement in place with the vendor that provides for a vendor repurchase if the lessee claims that delivery never occurred and/or raises issues with the equipment. 

Another option that a lessor can consider in place of obtaining a separate D&A is for the lessor to conduct a telephone call with the customer confirming its acceptance of the equipment. The risk in relying solely on a telephone call is that the lessor may likely face challenges in getting such a call admitted into evidence at trial. A recording of the telephone call can mitigate admissibility issues with proper authentication, provided that the customer was notified that the call was being recorded. 

Conclusion

While certain provisions and deliverables should never be waived, getting a deal across a finish line may sometimes require thinking outside the box. Under the right circumstances where the risks are minimal, certain exceptions and/or alternative options can be considered upon understanding and weighing benefits, as well as the related risks, involved.  Lessors should consult with legal counsel to consider any and all potential risks and benefits as they pertain to the specifics of the transaction prior to any waiver.