Like-for-like return allows a lessee, instead of returning the precise piece of equipment with the serial number listed on the lease documents for a specific expiring lease, to return another piece of equipment – usually similar or almost identical to the piece of equipment listed on the lease. Often, equipment from leases which are still active and have not come to conclusion is returned in the place of lost or un-returnable equipment on leases which have come to term. In some extreme cases “like” equipment may be purchased by the lessee and sent back to the lessor in place of un-returnable equipment.
Like-for-like return usually locks a lessee into some sort of buy-out when the lease portfolio as a whole comes to conclusion. This is not necessarily a bad thing but it is an exposure which lessees need to understand and prepare for. In addition if these “like-for-like” arrangements are not formally agreed to in the lease documents there can be significant exposure to additional costs including default and the related costs.
Example: The lease portfolio below had contracts which did not allow for like-for-like return, but the relationship had a long-standing “gentleman’s agreement allowing non-compliant return.” -. The company ‘stole from Peter to pay Paul’ for many years returning equipment from one lease to fill a gap of last or un-returnable gear on another lease. When the company decided to stop leasing the lessor changed its approach and would no longer accept the like for like return, and since like for like and partial return were not supported by the contract, the lessee was left with only two options: buy out the remaining leases or pay extension rents forever. What had started as a few servers missing from a lease here and there had turned into a $3 million problem.
Conclusion: First, make sure that your like-for-like / serial number substitution language is in your Master Lease Agreement. Second, even if it is, often times this language solves the short term problem of returning gear on an individual schedule but virtually ensures that when the portfolio is brought to conclusion there will be substantial end of lease costs – most commonly realized in a buy-out. To prepare for the buy-out companies should conduct an analysis of the all-in cost of leasing to determine the full cost of the program. This information provides context and leverage in buy-out negotiations with lessors.
