David J. DelCollo, Esq. 1 year, 11 months ago
Can Lease Exceed Value of Good?
Good Evening Mr. White,
First off, I want to say–great website! It is very informative and really breaks down the different types of leases and their requirements and impact on small businesses. So my question is not necessarily related to a small business, rather a larger business in the pharma industry. Company ABC is a company that supplies drugs to clinical trials. Company ABC has been receiving a great deal of requests from some of their pharmaceutical company clients, asking them if they would be able to lease equipment for clinical trials. Now, Company ABC is very interested in doing this, however, they want to pretty much take the cost of the good, divide it into equal payments based on the term, and then call it a “lease” because this is what the pharmaceutical companies wish to do (my guess is that they do not want the equipment on their books, nor do they want to deal with the liability and eventual disposal of the equipment).
Therefore, my question is this: Is is permissible for a lease to equal or exceed the cost of a good? For example, if Company ABC pays $1,200 for a piece of equipment and they charge a pharmaceutical company $100 per month for 12 months,-is it ok for the Company ABC to take the equipment back at the end of the term OR does the fact that the pharmaceutical company paid the price of the good over the lease term now mean that this is not a lease, but a sale of goods? What if pharmaceutical company had a two-year term, and now Company ABC has collected $2,400 for a $1,200 good,-is this ok? Ultimately, the pharmaceutical companies would not mind paying the lease even if it equals the price of the good b/c they just don’t want the good on their books and they don’t want the liability of it,-however, I think this would probably not be permissible under the UCC.
What do you think?
(Thank you so much for your time, I REALLY appreciate your time and help on this)1 Reply
Priyanka PrakashSpectator1 year, 11 months ago
Hi Mr. DelCollo, Here’s Jeff’s response:
First off, I should point out that we don’t give legal advice and you should consult an attorney if you have concerns on this issue. With that, said, it’s my opinion that one of the great things about the UCC is the power it gives two parties to contract with each other in pretty much any way we deem appropriate. The big requirement is that there must be consideration given to both parties (something of value). In this particular case, Company ABC is getting money in exchange for allowing their customers to use equipment that they own. Those customers are getting the benefit of the equipment without having to worry about the loss of taxes of that property.
Typically what you’re describing is an equipment lease with an option to buy. For instance, a $1 option lease would give the customers the right to purchase the equipment for $1 at the end of the 12 months, because they’ve already paid for the equipment. A Fair Market Value Lease would typically allow the customers to pay less per month but then owe a large lump sum payment for the fair market value of the equipment at the end of the lease term, if they want to own it.
It sounds like the customers never want to own it. Whatever they’re willing to pay should be fine, but if you’re worried about it just set the term for 1 year, or multiple 1 year terms, and make sure the total price is less than the total cost of the equipment. That should provide the protection you’re looking for, but again this isn’t legal advice. To ease your mind, think about Uhaul equipment. Those trucks have been paid for 2 or 3 times over again and they’re still operating, being leased to customers. The only difference is that a single customer almost certainly never pays the entire cost of the truck.
Fit Small Business, Managing Editor1 Reply