Types of Leases

EQUIPMENT LEASE ASSUMPTIONS

By Christopher "Kit" Menkin

Recently, John Deere purchased the stock of a local corporation owned by a husband and wife. He was to stay on for two years in management, with an option for "consulting" or continuing in development and sales. A difficulty arose when John Deere preferred not to sign a transfer of leased equipment. Since they were purchasing the stock, there was no legal requirement for them to sign any papers with the leasing company. Yet the seller did not want the liability. He was aware that a lawsuit for any reason would involve him as an individual, meaning he not only had personal liability, but would have to pay an attorney for his defense in anything involving the corporation. People sue for all types of reasons. Their attorneys will name everyone they can in an effort to bring pressure to their favor.

When closing the sale of a business, it is important that both the buyer and seller conduct a "clean" transaction, with all loose ends neatly tied up. Little details unattended to can not only interrupt a sale, they can kill it or contribute to unnecessary legal problems after the sale.

One such detail is a seller's personal guarantee on loans or leases. Both buyers and sellers should review all loans and leases. When a personal guarantee exists, the original guarantor (seller) will likely want their personal guarantee removed as part of the transaction. Both parties should insure the loans and leases are either fully paid off in escrow or the lease assumption or transfer agreements are completed before escrow closes.

With the exception of leases for real property, personal property and vehicles, most leases are not assumable. Leased equipment is legally considered as personal property. When attached to real property, it may be considered as real property (instead of personal property) since it is not removable and belongs to the owner of the building. Leased equipment attached to real property (such as a leased antique counter in a restaurant) is generally covered by a "landlord waiver" clause, giving the leasing company the right to remove their property from the premise.

A lease assumption or transfer is always required for proprietorship or partnerships. However, this is not required when the original lease is to a corporation. In this case, escrow can close or a sale can be made without the lease assumption or transfer. This is because a corporation is an entity unto itself. Only the owners or guarantors change, not the entity.

Generally, the lessor will not waive the personal guarantee unless legally arranged in a formal lease assumption or transfer agreement. The lessor, lessee, assignee, and guarantors must agree in writing to the lease assumption or transfer. The selling corporation should complete this prior to the close of escrow or they will have lost their leverage for this request. Twenty-eight years in the leasing business has shown that if this is not completed before the close of escrow, it will not happen later.

Most leasing companies commonly charge an up-front fee of $150 to $300 for a lease assumption or transfer. This covers the costs of credit investigation, documentation and accounting. There is no profit to the lessor for this service.

A standard credit application, personal financial statements and tax returns for two years are generally required for a proprietorship, partnership or corporation. These requirements may vary for corporations depending on their dollar volume, length of time in business and whether or not closely held.

Normally, requests for lease assumptions or transfers take ten to fourteen days to complete as all parties must sign documents, such as agreements, UCC, and new insurance binder.

Plan for an additional two weeks minimum to complete the transfer if the corporation is a large one, publicly held, and perhaps on the New York Stock Exchange. Larger corporations will have legal counsel review every step and every change in every document, as with the John Deere lease assumption. Often an executive officer's signature or corporate resolution will be needed to waive personal guarantees.

Many leasing companies will accept a credit application and financial statements before preparing the necessary legal documents, particularly if they want business from the original guarantor or the new "owners" in the future. The smart ones will even assist the original guarantor through the process by contacting the new "owners".