The general purpose of this clause is related to the residual value I mentioned last post. When a lease agreement is made, the Lessor (that’s us) has an expectation that the equipment will have a certain value at the end of the lease. The Lessee (you) are generally paying for the usable life of the equipment during the time you have it. 

In order to arrive at the predicted residual value, the equipment must be both used in the manner it was intended, and also be maintained in accordance with the manufacturer’s specifications. 

In general, the terms regarding maintenance and wear and tear will look similar to the following (note: these are simply big-picture examples, and not legal statements):

The Lessee will: 

• Keep the equipment in good condition and make non-warranty repairs at its own expense (depending on the equipment, there may be a further provision stating that repairs need to be performed by an authorized/licensed entity.) 
• Keep the equipment properly maintained and serviced as per the manufacturer’s specifications/recommendations (again, perhaps by an authorized service entity. Oh, and keep records too.) 
• Ensure the equipment is used properly, and only by competent, trained employees.
• If applicable, keep/store the equipment at the agreed-upon location.
• Not change or add to the Equipment unless agreed upon.
• At lease end, return the equipment in good condition and working order, with ordinary wear and tear resulting from proper use.
• Make the Lessor aware of any accidents, damage, or similar. 

In most lease agreements, assuming proper and intended use, the residual value is typically spot on. But if it is not at the predicted amount due to abnormal use – if there’s damage, excessive wear, or similar – the Lessee will certainly find themselves responsible for making up the difference between the actual value of the equipment and the residual value. 

*Note that there can be a gray area between what’s considered normal wear vs. excessive wear. The Lessor is the one who determines this, typically by referencing industry guides and manufacturer’s specifications.

It is always best to look at a lease agreement and leased equipment like you would if you were borrowing a tool from a friend, or better still, a beloved family member. You want to give it back in the expected condition, and while it’s with you, care for it as if it were your own. 

One of the better ways to protect your investment on a piece of equipment is to purchase a maintenance agreement for it. This is especially true if your equipment is expensive, and/or it’s really needed for your company to operate.

We’ve become somewhat conditioned as a society to resist certain add-ons. This usually comes into play at the electronics store, when the clerk asks you if you want a $199 warrantee / maintenance agreement on your $400 TV. Yea, that makes no sense at all.

But that’s not what we’re discussing here. Very often, companies come to us to finance equipment that is not only quite expensive, but also quite specialized. Items like technologically advanced medical equipment, CNC machines, specialized vehicles (like heavy equipment, cranes, well drillers, and similar), computerized POS / real-time inventory systems that span many locations… these are all examples of equipment that a company made a significant investment in, and needs to have working all the time.

The kicker here is these aren’t examples of equipment that a lot of people have experience working on. You’re not calling “Buck with a Truck” to perform yearly maintenance on (or fix) your CNC plasma cutting machine. You’re probably calling the company that sold it to you. And in a perfect world, you bought the maintenance agreement along with that plasma cutter.

But not everyone buys the maintenance agreement. Why? Because they financed the machine, and the bank wouldn’t include the maintenance agreement in the financing deal (indeed, the bank probably only financed 80% of the machine in the first place, but that’s for another post.) So the company goes without one, meaning they don’t get yearly maintenance, and they don’t move to the front of the line when a repair is needed.

That’s why, when you finance an expensive / key piece of equipment, it’s important to work with an equipment financing company who not only lend you all the money you need, but will ALSO finance the maintenance agreement. This ensures you can keep that expensive piece of equipment in good running order. Side note to this: as a lender, wouldn’t you want your customer to always be in full production mode? It makes paying back a loan so much easier. So to me, financing a maintenance agreement falls under the “no brainer” category.

Get the maintenance agreement with your equipment – insist your lender finance it, and if they won’t, shop around for someone who will (like me!)