An Overview of Equipment Rental Contracts
Equipment rental agreements are contracts between parties whereby the renting party is permitted to use specified equipment, owned by the letting party, in exchange for certain benefits. The relationship generally lasts for a specific period of time, and often for a particular purpose. While an equipment rental agreement may seem to be a simple matter for an experienced renter or lessor, there are a number of important and complex issues and terms to consider.
On a rudimentary level, an equipment rental agreement is akin to an article, or property, rental contract. For example, if I rent a car from a rental company , I am given certain period of time to use the vehicle, with express restrictions on how the vehicle can be used. In this case, if I drive the car to Chicago and back, even if I am safe and cautious, my actions with the car will likely breach the terms of my agreement with the rental company.
The distinction between an equipment rental agreement and a typical rental agreement is the technical nature of the item(s) exchanged. Most equipment rental agreements have deposits or other funds secured to the resulting lease of equipment. The funds serve as collateral to guarantee that the equipment is returned in operable condition, without damage.
Main Terms of Equipment Rental Agreements
Every equipment rental agreement should clearly spell out the rights and obligations of the parties. Key terms often include lease duration, rental payment structure, and security deposit requirements.
Lease Duration – The duration of a lease can be expressed in various ways. An equipment rental agreement may provide for a fixed term upon which the rental ends by mechanical operation. For example, a lease may simply provide for a specific period of time, such as six (6) months. As soon as that six-month period is over, even if no notice is given, the rental ends. On the other hand, the parties may enter into a periodic lease, where the term automatically extends from period to period, such as month to month, or week to week. A periodic lease can be terminated by the parties at any time by giving the requisite notice to the other party. A lease can also be terminated without notice, but such a lease would likely be for a fixed term. A periodic lease also generally allows for a next period rate to be established. Upon the beginning of each period, the rate for subsequent periods can be set, even if the parties agree on a final , long-term rate. If no rate is agreed upon, the periodic lease will end by mechanical operation of law, unless another rate is established by the parties when the next period begins. For example, if the parties agree to a rate of $2,000 per month for a period of three (3) months, and the rental rate to be $1,500 per month for the following six (6) months, and the rental only lasts four (4) months, the lower rate for subsequent months would not apply. The rental rate would be $2,000 per month for the first three months, and $2,000 per month for the fourth month.
Rent Payment Structure – Rental payment structure is very important. Whereas lease term describes how long the equipment is rented, rent payment structure describes how the rental payments are required to be made. Many times, rental agreements provide for the rental to be paid at the end of the lease, such as by lump sum financing. Other times, the payment schedule may require monthly installments to be paid during the term of the lease. In section 22.1, the parties agree that the rent is $____ per calendar month. Rent is due on the first (1st) day of each month during the term of the lease. At the end of the term, the entire amount of rent, plus any other charges, will be due and must be paid at the office of the Lessor.
Security Deposit – A security deposit may secure the obligations of the parties. A security deposit may be a flat fee, or it may be a percentage of the gross sales or receipts. Where a security deposit is a percentage of the gross receipts, an accurate tenant statement must be made or an auditor’s certificate for the calculation of thge security deposit is required.
Duties of the Renter in Equipment Rental Agreement
Upon acceptance of an equipment rental agreement, a person (the "renter") undertakes certain responsibilities. A renter must undertake the following: .1 Take Care of Equipment. The renter must exercise reasonable care in the use of the equipment and should maintain it in good condition. The pros and cons of who is responsible for maintenance of equipment should be discussed when negotiating a rental contract. It is not unusual for a rental agreement to require a renter to maintain, repair and return the equipment in good condition. Whether the rental agreement is for a short period or for years, the parties are free to negotiate whether the obligation to maintain and repair is the responsibility of the owner or the renter. .2 Insurance. The agreement may require the renter to procure and maintain insurance covering risks of loss or damage to the equipment for the term of the contract. .3 Use Clause. The agreement will often include a use clause (such as that the equipment will be used in a good and workmanlike manner) that requires the equipment to be used as intended. A typical use clause might read as follows: Renter shall use all of said property in a good and workmanlike manner and in accordance with all instructions, operators’ and maintenance manuals, and so forth, issued with respect to the equipment by the lessor, the manufacturer or others, and shall not use, permit or suffer said property to be used in any manner or for any purpose beyond the limitations for which such property is designed and manufactured, as such limitations may appear on said instructions and manuals and as may from time to time be agreed upon in writing between the parties hereto. .4 Right to Inspect. In order to determine if the renter is complying properly with the terms of the rental agreement, the owner of the equipment typically will have a right to inspect the equipment.
Obligations of the Rental Company in Equipment Rental Agreement
We are all familiar with ‘small print’, those terms and conditions of rental companies that accompany a piece of plant. Rental companies want certainty before they hand any equipment over to the renter and want to set out their expectations of the renter in black and white. In what follows, I outline common terms in equipment rental agreements in relation to delivery of the equipment, maintenance obligations and support.
Delivery
It is standard for equipment and plant to be collected from the rental company’s depot or the rental company will arrange for delivery – typically at the renter’s cost. The rental contract usually provides that the equipment will be inspected on delivery and the renter must notify the rental company in writing within a specified time period of any defect, damage or missing items to the equipment or deemed to be that way on delivery. In practice, this should be straightforward, but it can often become painstakingly detailed with regard to every inch of the equipment. The issue becomes more complex when you are dealing with movable items or where access to remote sites means that inspection of the equipment at the start is not possible.
Maintenance
The rental company usually retains responsibility throughout the term of the rental for maintaining the equipment. However, the renter is often expected to carry out routine maintenance during the term of the rental and before its return. Routine maintenance is often defined under the contract and can include oil changes, filter changes, refuelling and general upkeep. It is common in longer term rentals for the rental company to undertake periodic scheduled maintenance as specified in the manufacturers’ or owners’ manual or in accordance with any applicable law. This will be charged to the renter. Similarly, when any scheduled maintenance does not take place, or is carried out by the renter (or if the equipment cannot be used due to damage or loss as discussed earlier), the rental company often asserts the right to claim all reasonable costs incurred in remedying repairs, modifying the equipment or replacing any parts. The rental company’s standard rates apply to such repairs.
Support
Depending on the duration of the rental, the rental company may be required to provide support services for the maintenance, repair and replacement of spare parts. In such cases the contract will usually require the rental company to train and assist the renter’s personnel in working on the equipment. The rental company will often also require the renter to allow access to the equipment, during office hours and on at least 48 hours’ notice to the owner where assistance is required.
Risk and Liability in Equipment Rental Contracts
The equipment rental industry is particularly susceptible to liability risk. However, those risks can be reduced with a comprehensive terms and conditions document. From the perspective of the rental company, its rental agreement is the way in which it manages its liability risk. A rental company’s terms and conditions allow it to both manage and transfer risk. From the perspective of the customer, liability becomes a cost of the overall project. This allocation of risk is often beneficial for both parties.
Certainty and allocation of risk is crucial to industry efficiency. Nevertheless, industry standardization has not occurred in terms of risk sharing and allocation. Industry players have developed their own terms and conditions and modifying them to fit their business strategy. A customer that understands how to negotiate their rental agreement will be able to identify the risk that they are accepting and manage their business accordingly. Rental companies can expect some pushback from customers, particularly when they are loyal to a specific rental company, whose contractual terms and conditions are non-negotiable, and who they have handled numerous projects with over time. A rental company can ease any apprehension that a customer may have by explaining and justifying its position and demonstrating how it reduces overall liability risk.
Insurance has been used as a tool to manage rental risk. The obvious benefit of requiring additional insurance coverage with the rental is the extra layer of protection that provides. However, the secondary benefit to insurance is that it allows the contracting parties comfort that risk is at least statistically defined. Lender liability is becoming a greater risk for lenders. Standards are developing to guide the allocation of liability risk and risk mitigation strategies, using insurance or otherwise.
Termination Provisions and Sanctions
The terms and conditions of equipment rental agreements must deal with the termination of the agreement, as well as the penalties or conditions that may be applicable upon termination. For example, are customers required to provide notice to terminate? If so, how much notice must the customer provide? Are there any penalties or fees for early termination? What happens at the end of the term of the agreement? Does the agreement automatically renew for another term? Are there any restrictions on termination?
According to general contract law, the parties must have a meeting of the minds on all essential terms of an agreement, including termination . Some states require that courts will actually enforce a renewal clause found in a personal property lease only when the rental period and rental payments are specified within the agreement. However, most courts are reluctant to bind the parties to a contract unless the parties specifically agreed to the terms of the contract. Further, if an automatic renewal of a rental agreement is permitted, it is advisable to require either a termination notice or a written notice to disaffirm the renewal.
Contract Amendments in Equipment Rental Agreements
Any terms of an Equipment Rental Agreement may be amended or modified, but no change shall be binding if not in writing and signed by the party against whom enforcement is sought. Allowing flexibility in a rental agreement may help, for example, where the rental period is likely to be extended or subject to extensions, the rental rate is to be adjusted or the scope of use to be extended.
Equipment Rental Agreement Terms – Legal Implications and Standards
To ensure that your rental contracts are neither too favorable to the lessor nor unfavorable to the lessee, you can add terms, but those terms shall not violate otherwise relevant laws and regulations that may specifically provide protection or remedy for one party with regard to the purpose of the law. Things that potentially affect contractual freedom of parties may include competition law, tax laws, intellectual property laws, environmental laws, consumer protection laws, data protection and privacy laws, employment laws and other general legal statutes and established principles.
While some may think these laws have little, if any, impact on their business operations, having a legally vetted document can be a strong legal argument in itself. Without vetted provisions, however contrary the provisions are to local laws, there is a high likelihood such provisions may be considered as not binding under the local law and hence ineffective. The effect of this on the operation of the contract may be devastating, reversing obligations and rights which may not have been intended by the parties. These may include reversal of risk allocation, cost of indemnification provisions, warranty provisions, insurance obligations, etc.
In the context of a rental agreement, the lessor may want to include indemnification provisions, while the lessee may want to limit its liability. However, where the liability is subject to a statutory limit, it should not be possible to contract out of it, in which case the law may effectively override the intent of the parties, irrespective of the language used in the contract.
Final Insights on Equipment Rental Agreement Terms and Conditions
Here are some tips for both parties:
- Craft the contract in a manner that clears up potentially ambiguous situations. If you can anticipate a situation that could occur between the parties that might not be addressed in the standard terms and conditions, clarify how that situation will be resolved between the parties.
- Keep the agreement simple. While most rental documents are predictable from situation-to-situation, it takes extra time to go through the terms and conditions and adjust them to the situation . Clarifying the situation for either party saves time and money for both sides.
- Be sure to read all of the documentation, including the Terms and Conditions. While the Terms and Conditions should be reviewed prior to the rental of the equipment, it should also be reviewed if changes are made to make sure those changes were successfully incorporated into the rental.