If ever there was an aspect of equipment leasing which juxtaposed the legal with the unethical, the “evergreen clause” is it.
An evergreen clause, or evergreen lease as the word implies, signifies a contract that goes on forever. In actuality, it can end, but only after the lessee sends, within a specified time period, a letter stating his intent to return or purchase the underlying equipment. In practice, the procedure is deliberately made cumbersome by the Lessor. Hence, the lessee unwittingly pays in excess of the total price to which the parties agreed.
Most lease and finance agreements have a $1.00 buy out. This should nullify any chance of being “ever greened.” By-outs of Fair Market Value not to exceed 10 percent and a contract without any end position will have evergreen verbiage. These range from automatic renewals going month to month, or some automatically renew for a full 12 months. As a result, the customer doesn’t recall what they signed 5 years prior. They keep getting invoices for the same payment amount and their A/P keeps sending the payments in. Months later they sometimes catch it, but it’s too late. They still have to give the leasing company 90 days notice. So now they have to pay 3 more payments then buy the equipment for the designated amount. Sound fair?Interim Rent
When we explain this to physician groups, the response is ‘this is not legal’ but the fact is, it is legal because it’s in the contract. The equipment is delivered on March 5.
The lease/finance contract defines the “delivery date,” the “acceptance date” and the “commencement date,” all of which is very confusing. It states the lease payment will be due on the date specified by the Lessor in the month following the commencement day. So they bill for the “interim period” which is from March 5 to March 30, 25 days. Sounds nice and friendly; you only have to pay for a partial month. However, the lease doesn’t actually start until April 1. At the end of the lease term, they bill you again for the month of March. They get almost a full extra payment, just for asking. All of this is perfectly legal as it is “stated” in your contract. It can get worse if they charge “quarterly commencement.” This means they tell you they need to bill you the following “quarter,” which means they can get you for almost three months of payments – just for the asking. Very legal, very unethical.Blanket Liens
When you finance or lease a piece of equipment the lender will file a UCC Statement in the corresponding state where the lessee is incorporated. This insures ownership and the lender has a lien on that specific equipment. When the equipment is paid off, the finance company removes the UCC filing and sends the “release” to the customer who then takes formal ownership of that equipment.
There are some banks and finance companies that will file a Blanket Lien. This is a lien on everything that is located in the business or practice including accounts receivable. This means they essentially own everything in that practice whether the physician paid cash or owned it prior! Many times this will be the first piece of equipment financed and it is for a small amount, maybe $15,000. If the owner or physician ever wants to sell a piece of equipment they cannot get clear title if a blanket lien has been filed. And they own everything in that practice, because again, it’s in the contract. (Another example of taking advantage of someone unaware.)Forced Insurance
All leased equipment requires insurance. A company that finances leased equipment has ownership during the lease, but doesn’t actually have possession. If something happens to the equipment, the leasing company must insure that all the payments will continue to be made.
Most businesses carry adequate insurance and their policy can be amended to list the leasing company as “additional insured and loss payee”on the specific piece of leased equipment.
Some leasing companies do not take the time to do this. Instead, they “provide” insurance on the leased equipment through their chosen company and simply bill for the insurance coverage. You will have no control over the cost, no ability to make changes, and will be paying twice to insure the same piece of equipment. An insurance charge will appear on your monthly lease payment…and good luck trying to remove it.Prepayment Penalties
Finance companies, including banks, expect to receive the sum total of all the payments stated on the contract. Some companies will charge prepayment penalties. That is, the remaining payments due plus a fee – usually 3-4 percent. This represents the prepayment penalty.
Some companies will allow for a small discount after the first 12 months of the term. Since you are no longer billing this customer for the remaining payments, Chase Industries allows for a small discount – 6 percent.Gary Saulter is founder and President of Chase Industries, a nationwide specialty finance company which provides financing to the healthcare market