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Today’s topic is equipment leasing and the “Evergreen Clause.”
If leases weren’t bad enough already, most leases have a little trick in them called the “Evergreen Clause.” This clause can substantially increase the rate of return for the lessor, and at your expense.
Unlike a loan which terminates by itself when you make the last payment, most leases require that you give written notice to terminate. If you don’t give timely notice, the lease will automatically renew for whatever term is stated in the lease. This automatic extension is referred to in the leasing industry as the Evergreen Clause.
In lease contracts by more reputable lessors and most major banks, the notice period will be short, such as 30 days before the lease ends, and will renew for a one-month period. But the less reputable lessors will extend the time periods in the Evergreen Clause, which can cause you to be stuck making many additional payments on a fully depreciated asset.
The worse lease I ever saw was for a security system. The lease agreement stated that unless notice was given during a one-month window between 6-7 months prior to the scheduled termination of the lease, the lease would auto-renew for an additional five years! And by the way, this lease already had an implicit rate of 25% before even getting to the Evergreen Clause. The evergreen clause in this case effectively caused the lessee to pay for the equipment twice.
I strongly suggest that before signing any equipment lease agreement, have it reviewed by a qualified professional. By doing this, you can often negotiate these types of clauses out, or at a minimum, make them reasonable. If you’re stuck with an evergreen clause, make sure you have the termination window scheduled on your calendar. This will allow you to give timely notice of your intent to terminate the lease.
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