Avoid Terms That Take the “Ease” Out of Lease Financing

When schools seek to purchase new equipment (e.g., buses, copiers, or tablets), vendors frequently offer financing packages in the form of a lease purchase agreement (LPA) or other type of financing lease with a third-party leasing company. Though seemingly straightforward, the terms contained in LPAs can be extremely detrimental to schools.

LPAs are different from “true” leases and rental agreements. In a true lease, the leasing company typically remains the equipment owner. With an LPA, however, equipment ownership is transferred to the school. In exchange, the school pledges general fund dollars to make lease payments over time, and such payments include interest that the leasing company treats as tax-exempt. Additionally, the leasing company often holds a security interest in the equipment and may reclaim it if the school fails to make the lease payments or otherwise breaches the LPA terms.

We strongly recommend that school officials avoid LPAs and other financing leases. LPAs often include unfavorable, or even illegal, terms, including the following:

• the school must pay closing fees, document processing fees, and other hidden fees;
• the leasing company is authorized to unilaterally increase monthly payments without the school’s consent;
• the school must pay the leasing company’s attorney fees and collection fees if a default or dispute occurs;
• the school must indemnify the leasing company, which is prohibited by Michigan law;
• the school must pay personal property taxes on the equipment. Despite its tax-exempt status, a school may still be assessed if the 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;
• the school agrees to litigation in another state and to be subject to that state’s laws;
• if a default occurs, the leasing company may: (1) charge the school excessive late fees, (2) charge the school default interest, (3) repossess the equipment by entering the school’s building at any time with or without permission or notice, and (4) continue to require the school to make lease payments;
• the school may be required to pay service charges (e.g., copier maintenance fees) to the leasing company even if the vendor goes out of business;
• the person who signed the LPA agrees to assume personal liability if the school defaults;
• the leasing company may collect school officials’ contact information and send tele-marketing calls and spam emails; or
• a default may occur for minor issues, such as misspellings or insignificant incomplete information in the agreement, entitling the leasing company to remedies.

Vendors and leasing companies are generally unfamiliar with laws affecting Michigan schools, resulting in LPA terms that may violate state law or federal tax law. Typically, those concerns are not discovered until late in the process when legal counsel reviews the financing documents. Correcting those errors may cause significant delay. Because most leasing companies are reluctant to change their “form” documents, school officials may be left with the difficult decision to either delay equipment delivery while securing alternative financing or sign an unfavorable and potentially unlawful agreement.

To avoid those hazards, school officials should contact their Thrun finance attorney to discuss available options at least six weeks before the anticipated equipment delivery date. Instead of an LPA, we recommend financing equipment through an installment purchase agreement (IPA) with a local bank. Thrun’s IPA documents have been prepared and approved by our attorneys, have favorable terms for schools, and are widely accepted by Michigan banks and financial institutions.

As a final note, if a school has an outstanding bond that was issued in 2019 or after, the school may have a continuing disclosure obligation that arises from either a new LPA or IPA. School officials should review that possible obligation with their Thrun finance attorney. For Thrun Policy Service subscribers, continuing disclosure protocols are included in Policy 3212 (Post-Issuance Disclosure Compliance).