What is a Trucking Lease Agreement?
A lease agreement in the trucking industry is a document that spells out the terms and conditions of the leasing of equipment or other assets for commercial purposes. Unlike a traditional lease in a commercial real estate setting, a trucking lease agreement includes unique terms and conditions. A truck leasing agreement typically is an agreement between a company that possesses tangible assets and leases them to a lessee, who pays a fee, known as a lease payment, to be able to utilize the asset. The assets in the trucking industry are usually the trucks themselves .
The basic elements of a trucking lease agreement are similar to other commercial lease agreements, but the contracts themselves are less about the terms of the lease than the conditions under which the leased equipment can be operated. Common components include the term of the lease; how much the lessee will pay to use the lease and whether it will be an up-front lease or if it will be paid in installments throughout its term; the identity of the parties (the lessor and the lessee); the terms of renewal of the lease; the procedures for terminating the contract as well as the penalties for early termination; insurance provisions; indemnification provisions; governing law, arbitration and default provisions; security deposits, warranties and repairs; compliance with the law; and liability.
Important Components of a Trucking Lease Agreement
Both equipment leases and lease purchase agreements in the trucking industry should account for certain key elements in order to protect both lessors and lessees of commercial motor vehicles. These should include the amounts due for the term of the lease and when they are due, any required deposits, and the method in which payments are to be made. The duration or term of the agreement should be set forth in the contract, whether it is for a specified duration or on a month-to-month basis. If the lease is for a specific duration, it should also specify how delivery of same will take place, and if need be, the return of any deposits paid.
Generally, the lessor is responsible for maintenance and repairs on the truck, but this should be explicitly stated in the agreement, as well as the problem of how the costs of regular maintenance will be shared by the parties. Both parties should be aware of what their responsibilities are right up front regarding fuel costs, lodging expenses (if the owner operator will be away from home due to his/her duties), insurance costs, and taxes. In addition to lease or monthly payments, the lease should outline how and when other expenses will be paid.
It is also very important that the lease clearly state whether the truck will be used for both company and personal needs or only business-related purposes. The person/organization leasing the truck may want to limit the use of said truck to just its own business, unless otherwise agreed to.
Additionally, the lease should state whether or not the lessee will own the truck at the end of the term. Such clauses are known as lease purchase agreements, and contain key elements such as the option to buy the truck at the end of the lease term; the amount of the down payment required for the truck’s purchase; and the option to buy the truck before the lease term ends. In addition, there should be stipulations about what happens if the lease is not renewed, including the return of any deposits or down payments that were made.
The lease also should spell out remedies for default by either party; the event of the leasing company going out of business, and the process for terminating the lease. It is recommended that the lessee obtains a copy of the leasing company’s most recent annual financial statement and that the leasing company notifies the lessee if it goes out of business or files for bankruptcy. It is essential to make sure that the leasing company maintains all necessary insurance on the truck, which includes coverage of damage of theft. Certain leasing companies might require maintenance inspections of the truck at regular intervals via a third-party maintenance provider.
Pros and Cons of Leasing Trucks for Your Business
Entering into a lease agreement as an owner-operator can be a great way for truckers to maintain a degree of flexibility in their employment while still enjoying the benefits of working independently. However, it’s also important to recognize there are certain conditions and legal requirements involved in a lease agreement for trucking that could also work to your disadvantage if you’re not properly protected.
Let’s take a look at some of the biggest benefits and drawbacks associated with leasing for truckers:
Flexibility
For many truckers, being paid by the mile is a great advantage. However, the downside of being a true independent contractor is the fact that your income is not always predictable. If business isn’t booming during the holiday season or when certain weather conditions have most consumers hunkered down in their homes, your income could be impacted.
Leasing provides you with a flexible way to overcome these challenges. Unlike a finance agreement, which obligates you to pay a set amount every month until your truck is fully yours, most lease agreements allow you to adjust payments according to what your business can support through each month. You could even negotiate a period of lower payments in exchange for a longer-term lease.
Ownership potential
Because leasing does involve certain upfront costs, many truckers are often under the impression that they could never afford to lease a truck in the first place. However, this is one of the great benefits of leasing. While you are expected to make an upfront payment for such expenses as your down payment, title fees and sale tax, you may be able to wrap those costs into your monthly payment after that, meaning leasing could be within your reach.
Satisfactory lease completion works in your favor if you’d like to purchase your truck. If you’ve always dreamed of owning your own fleet someday, being able to purchase your leased truck will give you a good reputation for being able to handle the responsibility of ownership.
To qualify for financing on your truck once your lease is up, just as with any other agreement, you will need to maintain a consistent schedule of on-time payments in addition to having no other major negative items on your credit report. At this point, your lessor should be able to help you find a good deal on financing through a lease-buy back.
Cost-effectiveness
In many cases, leasing a truck will require you to put up a good chunk of change in the form of a down payment. However, compared to the much greater amount of cash you’d need to buy a truck outright, this upfront cost is minimal.
Additionally, the monthly payments you’ll be responsible for on incoming leases are typically much lower than the monthly payments on a financed vehicle. This is especially the case if you wish to purchase a new truck as opposed to a used truck.
While both types of payments are considered fixed expenses for a truck driver, lease payments are typically much more manageable through slow seasons.
On top of the monthly payments, truckers are also responsible for a number of additional expenses associated with leasing that aren’t necessarily part of a financing agreement. These include leasing costs, unanticipated repair costs, limited leasing amounts, and payments on accumulated ownership fees that could delay your lease-buy back.
Classes of Trucking Lease Agreements
With regard to lease agreements, there are five (5) different types of "lease" agreements that the trucker should be aware of under federal law:
- One-way Leases: One-way leases are usually less than 30 days long and typically simply permit the trucker to leave his or her truck at a particular location. Examples of one-way leases are short-term agreements wherein the trucker must drop off his truck at a predetermined location.
- Terminal Leases: Terminal leases cover a trucker’s use of his or her truck at a particular terminal for a period longer than 30 days. Terminal leases cannot exceed an original term of six months, and are renewable for another six months. Johnstone et al v. United Motor Freight, Inc., 1 I.C.C.2d 164, 167 (1982). Additionally, the lessee is not responsible for repairs and maintenance on the truck during the term of the lease. Id.
- Bumping Leases: Bumping leases are used primarily on railroads. Bumping leases allow an owner operator to drop off or pick up his or her truck at a particular terminal. The turnaround time for the truck at the terminal must be less than 24 hours.
- Finance Leases: Finance leases enable the owner operator to maintain responsibility for maintenance and repairs, and allows for the owner operator to purchase the truck by no later than the end of the lease term.
- Lease-purchase Agreements: A lease purchase agreement is where the purchaser "purchases" a truck with financing, and pays monthly installments on the truck with the opportunity to own the truck at the end of the lease term. "Leases-purchase" agreements are the focus of the U.S. Department of Labor’s investigations as to whether an independent contractor is actually an employee.
Common Mistakes in Trucking Leases
When it comes to truck leases, there are some common pitfalls that can easily be avoided. Almost as a cautionary tale, this section will describe some of those pitfalls and how to avoid them.
The first common pitfall is not reading the lease itself. Much like any other legal document, like a marriage license or mortgage, not understanding what is in your truck lease can lead to problems down the road. Make sure you read every part like a lawyer or at least have a lawyer review the document for you and make sure you understand it. No detail is too small or insignificant. Make notes of whatever questions you have and raise those questions to the leasing company.
Another common pitfall is neglecting to get everything in writing. If the leasing company suggests changes to the lease or makes promises to you , you want to make sure those modifications and commitments are documented in writing and added to the lease. A signed lease is a contract. Any changes to it should also be signed.
A third pitfall is not having a termination plan. Talk with your attorney if you have any specific concerns here. But generally, you will want to consider how long your lease is for and if or how it can be broken without penalty. You will also want to plan for what happens to your payments and control of equipment after being terminated.
Legal Issues in Trucking Leases
Legal Considerations in Trucking Lease Agreements
When preparing to enter into a leasing agreement with a driver, it is important not only to understand your own interests, but also to ensure that the leasing contract itself is not in violation of any applicable laws. This will not only prevent trouble down the road, but also ensure that a driver who brings suit against you in the future will not be successful in recovering for any alleged contract violations. Violations of the Federal Leasing Regulations in particular can have significant consequences on the validity of your leasing agreements, as well as how they are interpreted by courts when disputes arise. Many of the regulations will be of no surprise to seasoned industry veterans: the leasing contact must be in writing, not less than one year unless a number of exceptions apply, and must contain a number of lease-specific provisions. However, violations of even some of the technical details, such as specific provisions that must be contained in the lease language, can result in the agreements being deemed void, which means that the driver is then treated as an independent contractor. Other leasing contractual provisions that should be understood before drafting an agreement are those concerning termination, the sale of or change in ownership of the leasehold trucking equipment, and the "lessor’s right to control" the leasehold equipment and driver. Particularly, the "right to control" is essential to understand, as improper wording and interpretation of this provision can serve to convert a lease arrangement to an employer-employee relationship, placing an onerous burden on the leasing company. When preparing a trucking lease agreement, or even when asked to sign one, proper steps should be taken to ensure that all parties involved are in compliance with relevant industry regulations. Specifically, it is a good idea to seek legal counsel before preparing or enter into a trucking lease agreement, as there are many important legal considerations to think about, and issues that could result in loss of income if not properly understood.
Negotiating a Trucking Lease to Your Benefit
Fees and costs of leasing agreements rise annually, so it is essential to have a good understanding of what you are paying for, and how it compares to the market as a whole. A current look at average leasing contract costs will give you leverage in negotiations, and enable you to feel comfortable with what you are paying.
Like with most service contracts, standard leasing agreements will include negotiated rates on a per mile basis, and also potential fees for services including:
Examine what those charges are as compared to industry averages. Depending on its age, a tractor/trailer average fees can run anywhere from $400-$1,100 per month per truck/trailer combination, sometimes much more depending on leased accessories and other charges. It is important to distinguish between equipment-specific fees (i.e. a television fee may be charged for an installed TV), versus general fees specific to the leasing company. With most leasing companies you will have a dedicated contact who is responsible for negotiating your rates with the leasing company, and making sure the charges are scheduled correctly onto your statement. Set up, supply and mileage fees can also be tricky. Make sure to ask if the leasing company has any set up, supply, or additional mileage fees as compared to the average of other leases. For instance, freight agents averaging 1400 miles a week would be billed between $300-$500 for regularly scheduled tire changes. Extra mileage fees average between $50-$70 per hundred miles.
Some leasing companies will charge you upfront for scheduled maintenance and "preventative maintenance", which can include everything except for a blown engine. However, there is a debate within the industry about the necessity of preventive maintenance, in relation to a mandatory Maintenance Service Agreement. An MSA is similar a brand warranty on a leased car, but will require at least $2,200 -$2,500 of scheduled maintenance, regardless to your actual usage. In essence, scheduled preventative maintenance may be an option instead of an MSA, only for high mileage freight agents.
While some general fees are unavoidable, many of the industry’s fees and rules are negotiable, especially for larger companies with more vehicles. For instance, a leasing company that offers a single "gas fund" charge may save you money in the long run as compared to a leasing company that charge an individual fee for each charge card. The leasing company may also be willing to negotiate using only certain fuel companies, with which they have an additional corporate agreement, to stop you from using other gas stations with higher prices. But at the very least, a freight agent should know the single card, non-negotiable average monthly cost of the leasing company’s entire fleet of trucks.
As prices become increasingly competitive, it is possible you might be able to get better lease terms just because one leasing company wants your business more than the others. Like with everything, never be afraid to ask for a better deal.
Leasing Truck Disputes: What to Do
Disputes during the term of a lease agreement are not uncommon. If such disputes arise, it is important that all parties first refer to the applicable lease agreement for any guidance as to how such disputes should be handled. Many fleet leases will address (or will in fact provide a full schedule specifically for) disputes between the lessor and the lessee. As with all types of agreements, the goal is to make sure that all parties involved are well aware of their contractual obligations, and do their best to resolve the dispute fairly and in a manner that is consistent with their respective duties and obligations.
Under a great many fleet leasing contracts, the lessor may have the right to determine how to proceed in resolving the dispute, and may (in some cases) simply refuse to pay or continue to make payments until the dispute is resolved (in which case, this amount may be set off against any drawdown made by the lessor). A lessee may, for example, have to dispute the matter directly with the lenders and take steps to remedy the default (all at his/her/its own cost and expense) in order to restore the storage bank and remove the lessor’s lien thereon. It is clearly advisable for all parties to carefully review the relevant lease and to document in writing as much as possible the steps taken and the progress made toward resolution of any dispute, so that they are able to demonstrate to the lessor that a good faith effort was made to resolve the dispute.
At the same time, the parties should recognize that if the applicable dispute resolution mechanism does not afford timely relief, the courts will probably require at least that the parties act fairly and in good faith to resolve the dispute, even if that means obtaining a "fast track" hearing to resolve the issue at hand, at the preliminary motions stage . In recent years the courts have become more willing to consider evidence of good faith and any ulterior motives on the part of the lessor and the lessee in the course of determining whether to grant injunctive relief, rather than merely issuing an injunction based on equitable principles (namely, determining whether there is a "serious issue to be tried", and if so, whether the balance of convenience favours granting the injunction as sought). The courts have shown a reluctance to dispose of the matter by way of summary judgment and simply make any necessary amendments to the relevant lease or accept additional terms as pleaded by the lessee (if they see such an amendment as addressing the interests of both weigh parties). The basic approach to lease agreements therefore continues to evolve, and court decisions are too numerous to comment on in the space afforded to me.
Many lease agreements will provide for alternate forms of dispute resolution (such as mediation, etc.) as the first step to approaching a dispute resolution. Many a party has failed to properly approach a dispute involving an operating lease; in almost every case it is best to proceed in accordance with the applicable dispute resolution provisions in the lease, rather than proceeding straight to the court system. The cost of resolving disputes in this manner is invariably low, compared to going through litigation first, with all of its attendant problems and costs. Too many leasers fail to remember that the goal is to maximize the use of the asset (in the client’s favour), and to avoid a situation where the asset has become unavailable to both the lessor and the lessee as a result of the particular dispute at hand. At the end of the day, it is best to keep the equipment in operation and proceed from there, rather than jeopardizing this basic goal and allowing the parties to lose the opportunity to maximize the benefit from the relationship.