A sharp contract negotiator told me recently how much fun he has looking over leasing companies’ proposed master agreements. He says they’re so one-sided that he tries to see how many ridiculous provisions he can find in a single agreement. His record so far: 87. An agreement he ran across recently was no better or worse than most. It contained a common little “gotcha” in the area of lessor administrative fees. It should remind us how a provision that appears reasonable can still have a bite to it.
Let’s look at a way this can happen. If you’re a firm with good credit, most lessors will grant you the right to sublease the equipment they leased to you – if you negotiate for it. If your lessor doesn’t, you should talk to him about subleasing because it can eliminate or significantly reduce the cost of leasing equipment that you no longer need.
The lessor usually grants the subleasing right, subject to some conditions. These often include the following:
- You agree to remain ultimately liable until all lease obligations are fulfilled; that is, you remain the primary obligor.
- The sublessee must be creditworthy. (Of course, you should insist on this for your protection anyway.)
- The sublessee must agree to the terms and conditions of the original lease.
- The lessor has the right to approve the sublessee.
Insist on having the right to sublease without the lessor’s approval.
Granting the lessor veto power essentially surrenders your right to sublease. Besides, if you remain on the hook as the primary obligor regardless of who the sublessee is, the lessor won’t be hurt. So why the need for the lessor to approve sublessees? Good question, and one you should ask if your lessor digs in over this point.
Lurking deep within many lessors’ right-to-sublease provisions is the annoying and downright sneaky administrative-fee gotcha. Here’s a typical phrasing: “Lessee has the right to sublease the equipment, provided that all additional costs resulting from the sublease, including lessor-imposed administrative fees, shall be promptly paid by lessee.” Now, what do you suppose this will cost if you exercise your right to sublease? No way to tell, is there? It’s virtually a blank check. Would this “administrative fee” be a lessor’s out-of-pocket expenses? Its administrative overhead? Something else? Normally, this “administrative fee” is either a percentage of the lease value or a flat amount. In the case our contract negotiator colleague recently encountered, it was a one-time payment of $2,000. This administrative fee is nothing more than an additional revenue source.
Lessors will argue that they have certain back-office costs in setting up a new lessee. In reality, the only transaction required is completion of a sublease agreement. Most lessors don’t do much on the sublease because you’re still ultimately responsible and the deal continues to be based on your creditworthiness – not the sublessee’s.
So what’s the advice? Be especially aware of percentage-based sublease administrative fees, since they can result in unpleasant surprises. For instance, just 1% of a million-dollar deal is $10,000 – that’s a lot of money for processing some paperwork. If you can’t negotiate the fee away, make sure that it’s a known, relatively small, fixed amount.
Sublease deals are often done because you need additional horsepower and are leasing bigger and better equipment from the same lessor, and subleasing the original equipment will allow you to fulfill the terms of the lease agreement. In this case, the best negotiation tactic is to leverage the lessor’s new revenue from the lease against the administrative fee. The new incremental revenue volume of the newer lease goes a long way toward convincing the lessor to eliminate the administrative fee for subleasing the equipment that’s being replaced. But the best approach by far is to eliminate the possibility of a sublease fee altogether when negotiating the master agreement in the first place.
JOE AUER is president of International Computer Negotiations Inc. (www.dobetterdeals.com), a Winter Park, Fla., consultancy that educates users on high-tech procurement. ICN sponsors CAUCUS: The Association of High Tech Acquisition Professionals. Contact him at joea@dobetterdeals.com.
Copyright by Computerworld, Inc., 500 Old Connecticut Path, Framingham, MA 01701. Reprinted by permission of Computerworld.