Beware of the Hidden Dangers of Lease Financing

April 22nd, 2019

We often encounter vendors offering seemingly simple financing packages to assist schools with acquiring buses, copiers, tablets, and other school equipment. The financing package typically utilizes a lease purchase agreement (LPA) or other form of financing lease with a third-party leasing company. We strongly recommend that our clients avoid such financing leases.

Do not confuse an LPA with a true lease (i.e., a rental agreement), which is rarely used to acquire school equipment. Un­like a true lease, an LPA transfers equipment ownership to the school. In exchange, the school pledges general fund dollars to make “lease” payments over time, including an interest component that the leasing company treats as tax-exempt. The leasing company of­ten holds a security interest in the equipment and may reclaim the equipment if the school fails to appropriate money to make the lease payments.

The LPA documents frequently contain unfavorable or illegal provisions. In a single financing contract, we routinely encounter the following problems:

  • The school must pay closing fees, document processing fees, and other “hidden” fees;
  • The leasing company may unilaterally increase monthly payments without the school’s consent;
  • The school must pay the leasing company’s attorney fees and collection fees in the event of a default or dispute;
  • The school must indemnify the leasing company for the company’s losses, which is contrary to Michigan law;
  • The school must pay personal property taxes on the equipment (which, despite a school’s tax exempt status, may be assessed if a leasing company incorrectly reports the equipment to the local assessor);
  • The school waives its right to a jury trial;
  • The school waives its statutory rights and remedies, such as the ability to revoke ac­ceptance of latently defective equipment;
  • In the event of a default, the leasing company may: (1) charge the school excessive late fees, (2) charge the school default interest, (3) re­possess the equipment, and (4) continue to re­quire the school to make monthly payments;
  • In the event of a default, personal liability may be imposed on the school official who signs the contract;
  • The school may be required to pay service charges to the leasing company (e.g., copier maintenance fees) even if the service vendor goes out of business;
  • The leasing company may collect a school official’s contact information and send tele­marketing calls and spam email; and
  • A default may occur (and thus entitle the leasing company to the cumulative remedies discussed above) for minor issues, such as the school providing incomplete information to the leasing company or a spelling error in the school’s legal name.

Because vendors and leasing companies often do not understand laws applicable to Michigan schools, the proposed lease may violate federal tax law or state law. Typically, those errors are not discovered until le­gal counsel reviews the financing package, which is of­ten late in the process. Correcting those errors may cause significant delays. Further, most leasing compa­nies are reluctant to change their documents, leaving school officials with a difficult choice: delay equipment delivery by finding alternative financing or sign an unfavorable — perhaps unlawful — agreement. To avoid common pitfalls associated with equipment financing, please contact your school’s fi­nance attorney to discuss financing options at least six weeks before the anticipated equipment delivery date. We frequently assist school officials with soliciting bids from local banks to finance equipment using an installment purchase agreement. The documents are prepared by our office, contain favorable terms, often utilize local banks, and are widely accepted by financial institutions throughout Michigan.