STORIES FROM THE FRONT LINES – “You have an obligation to lease from us or pay penalties”

At times, as a part of an end of lease agreement, clients will agree to take some of the overall reduction in the cost of the transaction in the form of a credit to be applied against a future lease with the lessor.  This is almost always structured as an option not a commitment to lease from the lessor and usually has some time boundary around it.  In one real-life example, six months after a negotiation which contained one of these options, the leasing sales person called the client’s Controller and said “you have an obligation to place a new lease with us by the end of this month or you will pay a 25K penalty.”  The Controller called us very worried “Is that what we agreed to? It doesn’t sound right. I thought we had an option to lease and a $25K credit if we chose to – not a commitment with a penalty.”  The Controller was right.  There was no obligation or penalty.  We discussed the language in the contract which supported this and the Controller sent it off to the leasing company.  But the leasing rep would not give up and kept calling and threatening a penalty.  Eventually the calls stopped but 1 year later the leasing rep called back again with the same story and we went through the exercise again.

Conclusion:  Trust but verify.  When structuring end of lease agreements be careful that they do not create an obligation but instead define options.  Having expert assistance in the review of these documents and downstream assistance to manage issues as they arise can be invaluable.