"What is a coterminous lease? When would this make sense?"
Leasing equipment, whether you're a law firm in need of copiers, a hospital in need of scanners, or a business in need of phone systems, all of these agreements come with time-based contracts. These lease contracts typically state that you have the use of said equipment over a certain number of years for a determined rate. Though these contracts are stable, business conditions may change.
- Your hospital opens a new wing.
- Your law firm's caseload explodes.
- Your business needs to hire a dozen more employees.
What happens if each of these changes occurred three years into a five-year equipment lease? Though you could simply request a new five-year equipment lease for the increased resources, your accounting department may not be thrilled about the staggered nature of these various lease contracts. What if, at the end of your first lease...
- ...your hospital wants to price-shop?
- ...your law firm wants to move to multifunction devices (MFDs) company-wide?
- ...your business wants a portion of their representatives to work remotely, and the current technology won't suffice?
In such instances, coterminous equipment leases may be a smart way for you to simplify contracts and bring more bargaining power to future negotiations.
What is a Coterminous Lease?
Just as the name implies, a coterminous lease or contract is when multiple contractual agreements are structured to terminate simultaneously. In the context of a lease, this means that you structure secondary leases to end in tandem with preexisting contracts for a cleaner cut-off point.
Who Benefits Most From a Coterminous Lease?
You, aka the entity leasing equipment (the lessee) undoubtedly benefit more than the equipment owner (the lessor) in a coterminous equipment lease agreement. Firstly, your business or organization would receive a shorter-term lease for the additional resources than your initial contract. Secondly, it also gives your organization immense leverage leading up to a new lease agreement after your existing leases expire at the same time. If your leases were not coterminous, the staggered nature of multiple contracts would significantly decrease your bargaining power down the road—effectively leaving you at the poker table with an incomplete hand. While you could always opt to seek lease agreements with other lessors, juggling various leases from multiple lessors would likely be logistically inconvenient for your company.
How Coterminous Lease Agreements Benefit the Lessor
Though coterminous lease agreements definitely favor lessees over lessors, there is still a benefit for the company providing the leases. By agreeing to a coterminous lease agreement on the part of the lessor, this may act as a trust-inducing gesture—one that fosters loyalty nearing the end of your lease term. Agreeing to such an agreement may bode well for the lessor even when competitors provide their own attractive lease agreements. Simply put, would you be more apt to sign a new equipment contract with a lessor that agreed to a coterminous lease with your company? Being that not all lessors would be as flexible, there's an increased chance that you would.
Restrictions & Limits in Coterminous Leases
Even though coterminous lease agreements may seem like home runs for lessees, such contracts may still include restrictions, limits, tradeoffs, or differing rates to make such deals more palatable for lessors. At the end of the day, a lessor may not be able to provide a coterminous lease agreement as market conditions vary.
- A coterminous lease agreement is a lease that terminates at the same time as another lease.
- These agreements mostly benefit lessees, as they allow them to align assets to increase their leverage for future negotiations.
- Though a lessor may agree to a coterminous agreement, they may include additional stipulations or tradeoffs.
So, if you're a company or organization with the option of taking a coterminous lease with favorable terms, yes, it is a wise decision. Still, as with all contracts, it's recommended that you have the lease reviewed by a legal professional.