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EQUIPMENT LEASE HORROR STORIES

If you are a small business owner, and are thinking of signing an equipment lease, we advise you to carefully read the lease fine print, or discuss it with an attorney. Equipment leases are extremely complicated. Furthermore, because these contracts relate to business, rather than consumer items, they are not covered by many of the consumer protection laws.

Since 1989, the attorneys in our firm have advised dozens, if not hundreds, of small businesses. In those years, we have personally observed, or have been told about, numerous commercial lease pitfalls, including:

• Unusual jurisdiction clauses: Hidden deep in the fine print of the contract often lie clauses that force the parties to litigate any dispute outside of California. Many contracts specifically reject California law, and apply laws of other states.

• False representations: Many of our clients have advised us that the terms they were promised did not match the lease fine print. For example, clients advised us that they were promised that the lease can be canceled at will, or they have a “lease to own” when, in fact, the fine print contradicted this.

• Absence of all guarantees: Typically, the leasing company and the equipment manufacturer are two independent entities. Even if the equipment is completely defective, the small business person may be legally bound to make the lease payment. In extreme circumstances, even if the equipment stops working a week after it is acquired, or even if the equipment causes a fire and destroys the business, the small business person may be legally bound to pay the leasing company.

• Inapplicable or contradictory language: Sometimes, the lease is a boilerplate document that does not apply to the commercial equipment. For example, some boilerplate leases have language that forbids installing the equipment permanently to the business premise. We have seen a car wash lease with this language. Unfortunately, as soon as the car wash equipment was bolted onto the ground, the business owner exposed himself to a lawsuit.

• Harsh collection activity: If a small business cannot afford to make the lease payments, leasing companies often use extremely harsh or even bizarre collection activities. For example, rather than negotiate a reduced payment, or a lump sum settlement, they aggressively seek to recover the equipment, despite the fact that the used equipment has little or no value to them. But they understand that the equipment is extremely valuable to the small business. The leasing company uses this as leverage to force the small business to pay the lease, plus exorbitant penalties and attorney fees.

• Unreasonably difficult conditions: In some instances, commercial leases impose conditions that have no commercial purpose, other than to induce accidental breach by a small business. For example, some leases are advertised as “rent-to-own” – typically with a $1 purchase option at the termination of the lease. But in order to exercise her right to purchase the equipment at the end of the lease, the small business owner must give notice, in writing, to a specific address, within a very narrow time period. A notice received at the wrong address, or before or after the time window is void, and the business owner loses her chance to purchase the equipment.

• Kickbacks: In one instance, our attorneys discovered a kick-back paid by a leasing company to an equipment salesperson. Because of the kickback, the salesperson did not advise the small business owner that he could simply purchase the equipment from the manufacturer. Instead, the business owner was coerced into using an out-of-state leasing company, and signing an extremely expensive lease.

• Aggressive bankruptcy litigation: If the small business owner files for bankruptcy, and the leasing companies believe some of the equipment was lost, sold, damaged, or transferred away, they often file a lawsuit in bankruptcy court. Generally, they ask for a judgment equal to either the retail value of the equipment when new, or the balance on the contract (whichever is greater) plus exorbitant attorney fees. And they ask that the judgment not be discharged in bankruptcy.

If you are starting a new business in the San Francisco Bay Area, filing bankruptcy may not be on your mind. However, before signing a commercial lease, carefully review the fine print. If your business is located in the Bay Area, you want any lawsuit relating to the lease to be filed in the Superior Court in Alameda, Santa Clara, San Mateo, or San Francisco Counties. And you want the court to apply California law.

Many small businesses fail. If your business was in the San Francisco Bay Area, you will be able to get a fresh start by filing bankruptcy in the San Jose, Oakland, or San Francisco Bankruptcy courts. However, if the commercial lease contract invokes the laws of another state, you may find yourself in the unusual position of asking a bankruptcy judge in San Francisco to apply the laws of Iowa in order to determine legal disputes relating to your lease!

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