The Lease "Overhold" or Automatic Renewal
One of the fastest and easiest ways leasing companies make money on your equipment leases is to not tell you when your contract is coming due.
By: Ty Bakti
If you miss the notification date, even by one day, you're locked in to the lease for much longer than you bargained for.
Eight out of 10 organizations lease to one degree or another; and four out of 10 that do lease, miss their option dates, and go into overhold. The once fair interest rate you thought you had when you decided to lease rather than buy three or four years ago, may not look so good once you miss your option date.
Option dates typically carry notice requirements of 30 to 120 days, and sometimes longer. These clauses place the onus squarely on the lessee to advise the lessee of their end-of-lease intentions. Once missed, a lease option date penalty may commit you, the lessee, to payment extension periods which could range from one to twelve months. One to 12 extra lease payments you may not have been counting on!
In an example, one institution, after de-centralizing its purchasing operations, forgot to advise the leasing company that they wished to return the asset. The lease agreement stated that the lessee had to advise the lessor of its intention to keep or return the asset, 60 days prior to the end of the lease. Since they failed to do so, they were forced to make an additional 12 months of payments.
An example of a section of one agreement:
"This agreement shall remain in full force and affect for an initial term of (42) forty-two months from the first trade date subject to approval. Either party may terminate this Agreement at the end of such 42 month period by giving 270 days prior written notification of termination. In the event no written notification is given as set forth in the Agreement, this Agreement shall be deemed to have been renewed for an additional and automatic 18 month period. At any time during such additional period, this Agreement may be terminated by either party by giving 270 days written notification to the other party.
Pursuant to the Agreement, in the event that prior to the end of the initial Term: Correspondent terminates the Agreement; or Correspondent intentionally breached this Agreement, Correspondent shall pay an amount equal to the clearance charges incurred for the last 9 months based upon pricing set forth..."
If this sounds confusing, it is. Unfortunately, agreements written with such terms and conditions happen often, though time of advice or notification varies. It is time to stop some of the unnecessary expenses being paid.
Why is overhold so prevalent?
The writer talked to two major leasing organizations in Canada and the USA., about providing a more efficient and effective means in which lessees could be notified of their lease option dates. The response? “It's up to the person leasing to have a proper handle on their lease portfolio.” Therefore, is it the fault of the lessee when a lease goes into overhold? As a CEO of a leasing company said, “the leasing industry counts on automatic renewals...it's a bonus.”
The North American equipment leasing market exceeds $600 billion in sales. Hundreds of leasing transactions are finalized daily, featuring a multitude of rates, terms, conditions, and transactional structures. Interestingly, in spite of the profound impact that such financing has, few managers have a full handle on all of the aspects and implications of a lease contract. Consequently, hundreds of thousands of dollars are lost, or unnecessarily pass into the hands of lessors due to overpayments, incorrect tax classifications, or overhold, to name a few. More and more organizations, due to their ever-growing workload, fail to properly manage their lease portfolios.
Think about what you, the lessee, must do to ensure that your organization is not placed in an overhold situation. One answer is Trackmylease, an inexpensive, downloadable software program that eliminates overholds.