Who is this article intended for?
This article series is aimed at new or junior lawyers and can also be shared by in-house legal teams with their commercial colleagues who deal with contracts. The aim of the series is to provide a foundational understanding of common contracts businesses will enter into, offering insights into why they are important and what key legal aspects need to be considered. Whether you are just starting in the legal field or need to ensure that your business colleagues are well-informed about contract essentials, this guide will help with navigating the complexities of commercial agreements effectively.
When businesses need equipment but prefer not to purchase it outright, they have several options. Choosing the right option can impact costs, responsibilities and long-term commitments. Below, we outline the main types of hire agreements and key considerations for both customers and hire companies.
Types of equipment hire agreements
1. Operating Lease
An operating lease is a straightforward rental agreement where a business hires equipment for a set period, often short-term (e.g. daily car hire). In some cases, operating leases may extend over longer periods, such as for trains, planes or ships, but usually the term will cover only part of the asset’s useful life. The business never owns the equipment; it is returned at the end of the lease period.
2. Finance Lease
A finance lease is usually a longer-term arrangement that functions similarly to a loan. The hire company (often a finance house or bank) will buy the equipment from the manufacturer / a supplier and lease it to the business in return for regular rental payments. Over time, these payments cover the asset’s cost plus a profit margin for the hire company. At the end of the agreed hire period, the business may:
- Take ownership of the equipment.
- Return the equipment to the hire company.
- Allow the hire company to sell or scrap the equipment if it has reached the end of its useful life.
3. Hire Purchase
Hire purchase agreements give businesses the option, but not the obligation, to buy the equipment at the end of the agreed hire period. These agreements are often used for vehicles, IT equipment, and assets supplied by the hire company’s affiliated manufacturer or supplier.
Key considerations for customers
Before entering into an equipment hire agreement, businesses should carefully assess the terms to avoid unexpected costs or operational disruptions. Important factors include:
- Hire period and costs – How long is the hire period and what are the monthly or quarterly payments?
- Additional costs – Are there other potential costs and expenses which may be incurred by the business relating to the hire (e.g. insurance and maintenance costs)?
- Maintenance and repairs – Who is responsible for maintenance? If the hire company provides maintenance and carries out repairs, what is the expected service level to which such services will be provided (e.g. if the equipment breaks down, how quickly will it be repaired so it can be used by the business again)?
- Early termination risks – Under what circumstances can the hire company demand the return of the equipment on short notice? How would that impact business operations?
- Usage restrictions – Is the business restricted in how it can use the equipment, who can use it and at what location?
- End of hire period – What happens at the end of the hire period? Will the business have the option to purchase the equipment or must it be returned and if so how and in what condition?
Negotiating hire agreement terms may be possible, especially for high-value or large-scale agreements. Even if a hire company presents a standard contract which they say is non-negotiable, businesses should carefully review the terms to ensure they align with their needs and financial expectations.
Key considerations for hire companies
Hire companies face financial risks when leasing equipment. A well-structured agreement protects their interests and ensures smooth operations. Key concerns for the hire company include:
- Payment risks – The hire company may not get paid and may have difficulties enforcing payment and re-taking possession of the equipment.
- Loss and damage – If the equipment is lost or damage (e.g. due to incorrect or inappropriate use or misuse), the hire company may not be able to recover its resultant loss.
- Standardised agreements –balancing the need for consistent contract terms with potential customer negotiations.
- Legal and financial safeguards – implementing appropriate insurance requirements, security deposits and repossession rights.
While customers may seek contract modifications, hire companies should resist changes that increase their risk exposure. Given that many hire companies finance their equipment purchases, they must ensure agreements safeguard their financial interests.
Conclusion
Taking equipment on hire provides businesses with flexible solutions for acquiring essential business assets without large upfront costs. However, both parties must carefully assess the terms, responsibilities, and financial implications before entering an equipment hire agreement. Customers should scrutinise agreements to avoid unexpected liabilities, while hire companies must implement robust agreements to protect their interests. With careful planning and negotiation, a well-structured hire agreement can be beneficial for both sides.
