Equipment leasing may be an optimal solution for starting or expanding your brewery, brew pub or distillery because, among other things, it may greatly reduce up-front costs and expenses. However, when entering into an equipment lease, it is important to understand the terms of the agreement. Below is a list of 10 key factors to consider before entering into the lease:
- Term. Your lease will likely be for several years. The term is significant because the decision to lease may require your company to keep the same equipment for several years. This may not be compatible with your company’s growth and vision. Alternatively, you may want the lease term to be longer to ensure your company’s access to the equipment at the terms set forth in the lease.
- Lease Payments. To avoid breaching your lease, you company’s cash flow must support your monthly payment. Do your projections support the ability to pay the lease?
- Taxes. Ensure that you understand who is responsible for sales tax and other applicable taxes under the lease.
- Insurance. If your company is responsible for insuring the equipment, you must ensure that you have coverage in place and that the coverage selected is sufficient under the lease.
- Cost of Transportation. You must understand who is responsible for the cost of transporting the equipment to your business location.
- Installation and Setup. Along these same lines, you must understand who is responsible for the cost of installing and setting up the equipment.
- Maintenance and Repairs. Who is responsible for maintenance and repairs? If the lessor is not responsible for maintaining and repairing the equipment, your company may want to investigate estimated costs to avoid surprises. Your company may also want to consider entering into a service contract with a third party vendor.
- Warranties. It is important to understand the nature and scope of the warranties provided by the lease. Other warranties that are not spelled out in the lease may exist by operation of law. It is important to understand those warranties as well.
- Default. If you are late with a payment or otherwise do not follow the lease you may violate the lease and be in default. Likewise, if the lessor does not follow the lease, it may violate the lease and be in default. It is important to understand your rights and the lessor’s rights to help minimize disputes.
- Resolving Disputes. When a dispute cannot be worked out between the lessor and lessee, litigation often ensues. The lease may provide for numerous provisions that impact your company’s rights during litigation. For example, your company will likely be responsible for the lessor’s attorney fees, costs and expenses if you default under the lease. Likewise, the lease could restrict the state(s) where disputes may be handled, i.e., choice of forum provision. The lease could also restrict how disputes may be handled, i.e., arbitration and mediation provisions. Due to the practical and monetary considerations of resolving disputes under the lease, it is important to understand your company’s rights and the lessor’s rights before entering into a lease.
These are only a few examples of the issues breweries, brew pubs and distilleries face when entering into an equipment lease. Because of the significant amount of legal terms and conditions contained in a lease agreement, it is important to consult counsel before signing the lease.
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