Lessor Fraud: The 10 Most Wanted List

These are 10 of the most common tricks employed by unscrupulous leasing companies that cost lessees many millions of dollars each year.  While some of these provisions are fair and reasonable under certain circumstances, they are routinely misused by lessors to their financial gain.  Others are downright devious and may rise to the level of legal fraud.  If you believe that you have been the victim of any of these practices, you should seek legal counsel immediately.

1.         Automatic Renewals in $1 Purchase Option Leases.  A lease with a $1 or other nominal ($101 for example) purchase option is not a lease at all, but legally a financing like a loan. The lessor should own the equipment at the end of the lease without further payment. These are sometimes called “leases intended as security”, “conditional sale leases” or “dirty leases.” The term of a lease with a $1 or other nominal purchase option should never be extended.  This amounts to saying that after you have paid your home mortgage, you must remind the bank that it is paid in full and, if you fail to do so, the bank can charge you additional principal and interest for months or even years to come. 

Some lessors use lease forms that include “holdover”, “automatic renewal” or “evergreen” clauses. These provisions may be appropriate in leases in which the lessor does not recover its investment through rentals, but they should never be in a lease that is intended as security or as a conditional sale.

2.         Deceptive Automatic Renewals.  Automatic Renewals are also misused where the language of the lease is unclear and deliberately misleading.  Some lessors hide provisions requiring the lessee either to purchase the equipment or renew the lease, or to replace the lease with a similar equipment lease in sections marked "purchase option" or with similar language.  Sections are often cross-referenced in a manner that would confuse even lawyers, much less busy businesspersons.

3.         Unfair Automatic Renewals. Another fraudulent or deceptive practice is to require the lessee to give notice that the lease will not renew under unreasonable terms. For example, there are leases that give the lessee a window of 30 days or even less to notify the lessor in writing that it wishes to return the equipment at the end of the term. These notice provisions are often only 120, 180 or even 210 days before the end of the lease term, when a lessee is unlikely to think about what to do with the equipment. In some cases, we have seen lessors who encourage the lessee to give the lessor notice by telephone, and then claim it was insufficient as it did not comply with the terms of the lease requiring written notice.

4.         Unfair Purchase Options.  When a lessee agrees to lease equipment but expects the right to purchase the equipment at the end of the term, he usually thinks the purchase price will take into account that the equipment is used and that the lessee has paid most, if not all, the original cost of the equipment through rentals.  Some purchase options, however, state that the price is to be determined by the lessor, giving unscrupulous lessors the right to set any price they choose for equipment that may be vital to the lessee.  Other purchase option provisions require the lessee to incur significant expenses to deliver the equipment to locations as far away as across the country if it elects not to purchase, putting unreasonable pressure on the lessee to purchase equipment. 

5.         Tying.  Some leases require the lessee to purchase additional services from the lessor.  This action may violate federal and state law. 

6.         Interim Rent.  An interim rent clause provides that during the period from delivery of equipment to the date the lessee makes the first rent payment, the lessee will pay a daily proration or “interim rent”.  This is reasonable in the case of many leases but can be abused by the lessor to cause the lessee to overpay.  An interim rent provision can cause a lessee to pay more than the cost of the equipment plus reasonable interest. This is unfair and deceptive when the lessee has been told it is merely financing a purchase, not renting for a short term. 

For example, consider a lease of a $108,000 piece of equipment that the lessee agrees to lease for 36 months with a right to “purchase” at the end of the term for $1. Rent would normally be $3000 per month (over 36 months, that equals the full $108,000), plus an interest (“lease rate”) factor.   This is all fairly standard and, depending on the lease rate factor, may be entirely reasonable.

If the equipment is delivered on the 5th of the month and the Lease provides that the rentals begin the first day of the next month, the lease has an extra 25 (or 26) days. If the lessee pays 1/30 of the monthly rent ($100)for these days, it is paying about an extra $2500, plus interest. This means that the cost the lessor is recovering is not its $108,000 investment, but $110,500.

7.         "Estimated' Tax Payments.    Many leases require that the lessee "reimburse" the lessor for property taxes.  In some cases, lessors "estimate" the annual property tax payment with the promise that any excess paid by the lessee over the actual amount charged by the tax authority will be rebated or applied to the lessee's obligations. It is not uncommon for lessors to estimate and collect an unreasonably high tax, and fail to return the excess amount to the lessee. 

8.         Denial of Inspection Rights.  By law, a lessee is supposed to have the right to inspect equipment when it is delivered and confirm that it works and is the correct model before the lease term begins. Some lessors, particularly those connected to equipment vendors, provide in their lease forms that the lessee waives this right by agreeing that the term commences on delivery. Because the lessee cannot cancel the lease or withhold rent payments, the lessor may attempt to force the lessee to pay for equipment that it never ordered or that never works properly.

9.         Advance Fees & Deposits.      Some lessors and equipment lease brokers collect fees in advance of arranging financing. This practice may violate state law in many states. Unless the terms under which the advance fee or deposit is to be returned are clearly stated in a written agreement between the lessee and lessor or broker, requiring an advance fee or deposit may be part of a scam.

10.       Bait and Switch.   “The oldest trick in the book” still works too often. A lessor or broker will present a lessee with a proposal under which the lessee pays the full cost of the equipment (plus interest) through the rentals but owns the equipment at the end of the term. This is often called a “lease intended as security” and is really a loan. When the documents arrive, the lessee may not notice that the form requires the lessee to make a substantial additional payment at the end of the term in order to keep the equipment. 

Other lessor frauds along these lines include switching from rent in arrears (paid after each month ends) to in advance (paid for the month ahead), adding limitations on the use of the equipment or failing to disclose to the lessee upfront that personal guaranties or other credit support will be required.