Leasing rather than buying equipment raises own issues

Contract Language. By Steven M. Harris, amednews contributor. Oct. 7, 2002.

CONTRACT LANGUAGE

A column examining the ins and outs of contract issues

SEE ARCHIVES

Because of the availability of new technology and the increased capital expenditures in relation to your patients' needs, you may decide that it is better to lease rather than buy equipment for your practice.

There are several considerations that may drive your decision and that you should consider during a review of a proposed lease agreement, including: term and rent payments, maintenance, risk of loss, insurance, option to purchase and taxes.

Term and rent payments

See related content

The term of the lease agreement should be specifically defined and include a date when the lease begins and a date when it ends. Often lease agreements include an automatic renewal provision. In such a case, be sure to mark your calendar for the future date so you will not automatically agree to a lease extension.

The rent installments should be payable monthly by a set date and may include a penalty provision for late payment. You may request written notice indicating your payment is late before assessment of a penalty.

To assess whether the installments represent the fair market value for leasing the equipment, consider calculating the monthly rental installment based upon a per diem payment, which is computed by dividing the annual rental cost by the average number of business days in a year.

Maintenance

The lessor should maintain the equipment in its operating condition and make any necessary repairs at the lessor's sole cost and expense.

Your equipment lease agreement should contain a provision that specifies that the lessor will keep the equipment in good repair, condition, and working order so that compliance with any applicable standard maintenance schedules and warranties are the sole responsibility of the lessor as the owner of the equipment.

Risk of loss

Make sure that the risk of loss for the equipment does not transition to you until you accept delivery of the equipment within your office. An equipment manufacturer will often attempt to pass the risk of loss, which may include damage, destruction or theft of the equipment, to you upon shipment. You should not accept the risk of loss until you have received, inspected, and insured the equipment for public liability and property damage insurance coverage. Be sure to check the equipment for performance.

The following is a sample risk-of-loss provision for an equipment lease agreement: "Risk of Loss: Lessee shall bear all risks of loss of and damage to equipment from any cause while equipment is on Lessee's premises, exclusive of ordinary wear and tear and loss or damage covered by insurance; and occurrence of such loss or damage shall not relieve Lessee of any obligation hereunder. In the event of loss or damage, Lessee, at Lessor's option, shall: (a) place the damaged equipment in good repair, condition and working order; or (b) replace lost or damaged equipment with like equipment in good repair, condition and working order with documentation creating clear title thereto in Lessor."

Insurance

Before executing an equipment lease agreement, you should contact your insurance carrier and have the equipment insured for public liability and property damage. The lessor will probably require you to purchase insurance coverage in a form and amount mutually agreed upon by the parties.

You might be required to deliver certificates of coverage to the lessor prior to or upon execution of the equipment lease agreement.

You also should be responsible for insuring the equipment against all risks of loss or damage from every cause for not less than the full replacement value of the equipment.

Consider including a provision within the contract stating that if either party fails to provide the agreed-upon insurance coverage, the other party may obtain coverage for part or all of the terms of the equipment lease agreement or such period beyond the term as is required by the insurance company issuing such coverage to protect both parties' interests.

All insurance proceeds received by either party should be applied toward the replacement, restoration or repair of the equipment.

Option to purchase

If you think that you might eventually want to purchase the equipment, you should include an option to purchase the equipment within your contract. This option should state that in consideration of the rental installments paid by you, you are granted an option to purchase the equipment from the lessor at the price and on the terms and conditions set forth in the equipment lease agreement.

Provided that you are not in default under the contract, you should be able to exercise the option to purchase the equipment from the commencement date of the lease agreement until the expiration date.

You will probably have to notify the lessor in writing that you are electing to exercise your option to purchase the equipment, and agree to enter into a written contract for the purchase and sale of the equipment. That contract should include the calculated price as provided in the initial equipment lease agreement.

Taxes

The lessor, not you, should be responsible for the payment of all sales, use, excise, personal property, stamp, documentary and ad valorem taxes, license and registration fees, assessments, fines, penalties and similar charges imposed on the ownership, possession or use of the equipment during the term of the equipment lease agreement.

The lessor should also pay all taxes imposed on the lessor or lessee with respect to the rental payments made by the lessee during the term of the equipment lease agreement.

Harris, a partner at McDonald Hopkins in Chicago, concentrates on health care law and has counseled physicians, physician networks and health care groups nationally. The author and publisher are not rendering professional advice and assume no liability in connection with its use. He can be reached at 312-280-0111, or by email (sharris@mcdonaldhopkins.com).