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How an Operating Lease Works

How an Operating Lease Works

The Nature of an Operating Lease

If your requirement is only to use the equipment for a defined period rather than acquire it, an operating lease (which is in effect, to a simple hire agreement) is probably most appropriate for you. As opposed to a finance lease and lease purchase, you have limited responsibilities for the equipment whilst you use it and the economic risks are retained by the lessor. It is most commonly used in situations such as fleet hire, vending-machine hire or the like.

Before entering into an operating lease, you should take professional advice about, firstly, whether that form of financing is appropriate for you, and secondly the accounting, tax, capital allowance, and balance sheet consequences of the particular commercial and legal terms of the operating lease contract you are considering.

Operating Lease Documentation

If you intend to enter into a series of transactions with the lessor, there may well be a Master Agreement governing all future transactions and equipment leasing contracts in relation to each specific item of equipment.

Key terms in an operating lease will largely be commercial rather than financial. They may well include:

  • the commencement and duration of hire, hire charges, increases in charges and payment terms;
  • certification of acceptance, indicating when you have accepted the equipment as satisfactory; maintenance arrangements;
  • obligations and limitations as to your use of the equipment;
  • the requirement properly to insure; assignment to you of any warranties received by the lessor from the manufacturer of the equipment; and
  • return of the equipment by you at the end of the agreement.

Unlike a finance lease or lease purchase agreement, you will not have provided the lessor with his capital cost and return on investment by the end of the period of hire.

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