Trends We Are Watching
The law is an ever-changing discipline and sometimes its evolution goes a bit toward the dodo bird rather than the eagle.
Because we spend so much time in the industry, we find ourselves raising eyebrows over trends in equipment finance litigation and other hot-button issues. Here are a few things we have been talking about in the office. Take a look at your documents, even if we prepared them, and check your policies and p
ractices. Give us a call if any of these apply to you.
Interim Rent. After years of waiting for the other shoe to fall, we now have litigation regarding interim rent. With particular reference to Equipment Finance Agreements and $1-Out Leases, all of which are full payout obligations, the practice of charging 1/30
th of a rent payment may leave a lender/lessor vulnerable.
Recognize that we are not arguing the ethics of the issue, nor are we questioning legal enforceability at this time. The argument can be made, however, that charging an additional amount that is conceptually "principal" results either in undisclosed interest or excess principal being collected. This exposure is even greater, of course, where rents are collected quarterly, resulting in as much as three additional months of what a borrower's lawyer would call "overpayment".
There are several ways to fix this situation and whether it applies to a given transaction depends on the transaction economics and the wording of the document.
Identity Theft. Several states are considering or enacting legislation regarding the failure to protect a customer's identity. If your documents include disclosure of social security numbers or other potentially sensitive information, it may be advisable to move these disclosures to a document that will not be included in a syndication package or otherwise available to third parties. Cybersecurity is, of course, a major issue for banks and is being passed along to lessors in several instances. Remember that good old paper identity theft is no less a problem.
Damages. It is amazing that the variation in remedies clauses is so great. How does your lease handle such issues as the lessee's failure (or refusal) to return equipment? The definition of a lease "termination" or "cancellation" (which is different under the UCC)? The calculation of future rents and how this can be worded so as to avoid the claim that the lessor is entitled to an unenforceable "penalty"?
Most of all, does your operations staff recognize when it can require payment of late fees or call a default and are your procedures for these standardized? Do your various document forms include the same basic calculation or can they be confusing to your staff?
Doc Fees. While there is no major change here at the present time, we continue to be concerned where doc fees are either not clearly disclosed or cannot be justified in terms of actual out-of-pocket costs. Simply including somewhere in the document a statement to the effect that the fees are not intended to represent actual reimbursements may save potential liability.
Interest Rate Disclosures. We continue to advise that an Equipment Finance Agreement should either disclosure the interest rate implicit in calculating monthly payments, or state the equipment cost or that another figure will be used to calculate payments. We recommend that the document enable the borrower to calculate the actual rate of interest it will pay. There are states in which it could be argued that this disclosure is required, but the more important issue is that the document not state a rate of interest if that amount is arguably incorrect because of purchase price adjustments, interim payments or other circumstances.
Please note that nothing in this article is intended to state an industry norm or describe practices we believe to be unethical or violative of any law. This article is not intended to be, and may not without our consent be, used as evidence of industry practice or policy.