Most equipment finance companies know the challenges of reviewing panel funding template lease forms. This article will highlight some common deficiencies and why these clauses are important.

Missing sanctions language
Banks and equipment finance companies must comply with Office of Foreign Assets Control (OFAC) regulations and ensure that new customers are screened against the OFAC sanctions list before entering into leases. There is also an ongoing obligation to continuously monitor customer accounts. It is, therefore, imperative to include a lease clause that the lessee shall not be listed on a U.S. or foreign governmental sanctions list. However, this is one of the most common things missing from lease forms.

This is a big problem because even if a lessee clears the sanctions list prior to origination, the lessee could later be added to the list. Unfortunately, if a lease does not include this as an event of default, the lessor has no ability to declare a default and terminate the lease. Worse yet, sophisticated capital market buyers will not buy a lease without such a default trigger.

Missing language designating the sole “original”
Many lease forms fail to include proper language designating what constitutes the sole original chattel paper. The Official Comments to UCC 9–330 allow the parties to agree upon what shall be deemed to be the original for purposes of taking possession of the chattel paper. Best practices in the industry dictate the inclusion of a clause to designate that the lessee’s wet ink signature, scanned signature or electronic signature coupled with the lessor’s wet ink signature constitutes the sole original. And for electronic chattel paper (i.e., per UCC 9-105), the clause should reflect that the single, authoritative copy (the digital equivalent of the paper “original”) will be the form designated as such in the applicable electronic vault.

This is important because the holder of the original chattel paper gets “super” priority status over prior liens (including blanket liens) on the chattel paper (similar to holder in due course status).

Many lease forms fail to address the foregoing and simply provide that an electronic signature is enforceable. This is a good start but fails to address the critical “original” issue.

Some lease forms provide that a paper-based lease with electronic signatures by both lessor and lessee constitutes the “original.” This is still problematic because if both parties sign electronically (and assuming this is not electronic chattel paper stored in the applicable electronic vault), there would be no practical way to distinguish the “original” from a copy. In other words, there would be no demonstrable “original.”

Lack of tax benefit indemnity
Many lease templates don’t include a tax benefit indemnity clause to protect the lessor in the event the lessor is not able to take depreciation and other federal tax benefits.

This language should be in every FMV lease form because the lessor is the owner of the equipment and is, therefore, the one entitled to seek such tax benefits. However, many lessors fail to understand that the general tax clause obligating the lessee to pay all required taxes does not address this issue. Nor is the typical general indemnity clause broad enough to pick up loss of tax benefits.

As a practical matter, the lessee will probably not attempt to take tax benefits for an FMV lease because the lessee would not be the owner of the equipment. However, there are other actions a lessee might take that could potentially impact the lessor’s tax treatment. For instance, using the equipment outside of the U.S., or making modifications to the equipment to make it limited use property. There is no compelling reason for the lease not to address this head on.

Lack of general indemnity survival clause
Many lease forms do not contain a clause providing that any obligations that are intended to survive the termination of the lease, including indemnities, will survive lease expiration or termination. This type of clause is important because claims can arise during the term but remain unknown by the lessor until after the lease term. For instance, personal injury claims and claims involving unpaid taxes.

There is no compelling reason why a lessor should not address this rather than simply hoping a court will find this to be the implicit understanding or that there might be state common law that would address this issue. 

Lack of cross-default language
Despite being a common provision, many lease forms do not contain language providing cross-default to other leases with the lessor (or a third party). This is important to protect the lessor by ensuring that if a lessee cannot fulfill its obligations under one lease and the lease is called in default, such other leases can also be called into default.

Cross-defaults encourage repayment and ensure lease defaults can be dealt with at one time. These clauses also deter a lessee from “cherry picking” which leases it will choose to pay. Last, defaults on other leases may give the lessor an early indicator of the lessee’s overall financial difficulties and the right to take action even if the lessor is being paid on a timely basis on a given lease, but not such other leases.

Sometimes cross-collateralization language will be combined with the cross-default clause. When the leases are also cross-collateralized, this allows the lessor to apply the net excess proceeds from the disposition of the equipment under one lease with the lessor to satisfy amounts owed under another lease with such lessor.

Lack of a non-waiver of remedies clause
Many lease forms do not contain language providing that any specified waiver of a right or remedy given by the lessor, or any delay or failure on the part of the lessor in exercising a right or remedy, is not a waiver of any right or remedy in the future. This type of clause is important in the case of the lessor intentionally waiving a certain default under a lease but not intending to thereby waive any future defaults. It also addresses a lessor inadvertently waiving its available remedies against the lessee by virtue of its conduct. For instance, a lessor may inadvertently fail to serve notice of default and/or termination immediately, which could be construed as an affirmation of the lease.

A non-waiver clause makes it clear that a given waiver does not mean future defaults will be waived. It is also important to help preserve the lessor’s rights and remedies should the lessor fail to act on a breach of contract claim.

Lack of a usury savings clause
Many lease forms do not contain a clause that specifically attempts to negate a claim by the lessee that interest payable under the lease is usurious, or unreasonably high, in violation of state usury laws. Typical language provides that the lessor does not intend to charge interest above the legal limit and that any amounts determined to exceed the limit will instead be applied to the principal or refunded to the lessee. This is important because many states have laws that limit the interest lenders may charge in lending transactions.

A usury savings clause is common and essential to protecting the lessor but note that these clauses remain subject to state public policy. For instance, some courts will only give effect to such clauses for events outside of the parties’ control that may increase interest rates. For instance, when interest rates are tied to outside indexes such as SOFR or Federal Reserve Rate increases.

Conclusion
Words matter. And certain words should always be included in lease forms, particularly the important words referenced above. These key clauses don’t just keep leasing attorneys up at night—they protect the lessor’s economic interest.