Protection the Equipment Lessee from the Potential Consdquences of the Lessor's Bankruptcy
In the coming year, many corporations, government agencies, and institutions such as universities and hospitals will be leasing much of the equipment they need to perform and support their functions. This leased equipment will include heavy transport vehicles, airplanes, industrial machinery, business equipment and, most frequently, sophisticated and expensive computer equipment. The primary reasons for deciding to lease rather than purchase are the opportunity to obtain the lowest cost of funds for financing the equipment acquisition, the undesirability of making or inability to afford a substantial capital investment, the ability to take advantage of the benefits of the investment tax credit and accelerated depreciation which may flow to the lessor (and which may not be directly available to the lessee because of its tax position) and then indirectly to the lessee in the form of lower rentals, and a number of other more complex tax and accounting advantages.
There are, of course, certain potential economic disadvantages to leasing as compared to purchasing. The lessee is obligated to pay rental for the equipment for the entire term of the lease even if the use of the equipment is no longer necessary or the equipment becomes obsolete. The lessee may be able to protect itself to some degree from this eventuality if it negotiates a right to terminate the lease during the term. However, this protection may be limited in that there will probably be either a substantial charge owed the lessor upon termination or the lease rentals will be higher to compensate for the lessee's obtaining a termination right. If the equipment, rather than becoming obsolete, maintains or increases in market value, the lessee will not realize the appreciation which it would have realized as owner. The lessee, however, should be as secure as a purchaser in its use and possession of the equipment during the lease term, providing the lessee makes its rental payments.
One unavoidable difference, however, in the degree of security on the part of the lessee, as compared to a purchaser, is the right of the trustee of a bankrupt lessor to reject the lease or at least the executory covenants of the lessor.
Suher, Thomas R.
"Protection the Equipment Lessee from the Potential Consdquences of the Lessor's Bankruptcy,"
University of Dayton Law Review: Vol. 4:
2, Article 8.
Available at: https://ecommons.udayton.edu/udlr/vol4/iss2/8
Thomas R. Suher is an Attorney, Western Electric Corporation. B.A. Amherst College, 1971; J.D., University of North Carolina School of Law, 1974.