A Comprehensive Guide to Lease Agreements for Trucking Companies

All You Need to Know About Trucking Leases

When it comes to leasing a truck for commercial use, you will be subject to the same type of lease agreement that is used when leasing other types of vehicles. This is generally a standard agreement that includes many of the same considerations outlined above. If you are leasing a truck from a company that specializes in leasing trucks rather than standard passenger vehicles, they may offer a different type of lease agreement with more details.
Lease agreements for trucking companies are more likely to be a little longer than other types of leasing agreements due to the special needs of a company that is acquiring business equipment meant for carrying heavy cargo. For example, if the transaction will not be documented with a UCC-1 filing this should be clearly stated in the lease agreement. A UCC-1 filing is often done by banks to document the fact that a borrower has openly used secured funds from the bank to make a purchase and has the bank’s permission to do so. In the absence of a UCC-1 filing, a lease agreement should include that the lease does not grant the lessor a security interest in the asset . Particularly, for a trucking lease agreement, the lessor should specify what legal jurisdiction will apply. For example, certain aspects of a trucking lease agreement may fall under federal law due to the fact that the trucking company does not operate solely in one state, but its activities span across multiple state lines. For example, interstate or interstate commerce regulations tend to apply to the operation of the truck, such as record keeping and maintenance. Liability protection is another important aspect of a trucking lease agreement. The lessor may want to ensure that the lessee carry liability insurance in the event that there is an accident while operating the leased vehicle. If the lessor is held liable in certain situations, then limited liability for the lessee is ideal. Since almost all lease agreements are contracts, it will include information about default, events of default, remedies, waiver, amendment and consent to dealing with other areas such as miscellaneous issues.

What to Include in Your Trucking Lease Agreement

The primary components of a trucking lease agreement will include the following:
Term: how long will the lessor and lessee be bound to the contract? Whether for a set period or absent a set term, the terms and conditions governing termination should be clearly articulated.
Rates/Pricing: determine the pricing structure for the lease agreement, including any ongoing monthly fees, security deposits, or other associated costs.
Responsibilities: detail the roles and responsibilities of both parties. Who is responsible for routine maintenance? Uniforms? Operational efficiency?
Operations: how will business operations be managed? Will the parties establish a joint venture? Or will one party manage most of the day-to-day operations with the other entity overseeing overall compliance with financial, state, and federal regulations?
Representations and warranties: outline guarantees from both parties, such as promises to abide by all applicable laws and regulations; your obligation to ensure proper insurance coverage; and your clients’ obligations to indemnify against certain losses.
Non-competition/non-solicitation: how will you protect yourself from unfair competition? Your leasing company from losing business to your drivers? Under what circumstances can the leasee establish a direct relationship with your client base?
Confidentiality: how do you ensure that your trade secrets remain just that? Will you require the other party to formally agree to keep certain sensitive information confidential? Note that non-disclosure agreements are not fool-proof—but such soliloquies can help protect your business.
Your trucking company needs to be prepared for success. Strong lease agreements that clearly delineate roles, responsibilities, authorities, and compensation structures are essential. With these items firmly in place, you can rest assured that you’re well-equipped for ongoing success.

Different Types of Leasing Agreements

When considering leasing options for your trucking business fleet, there are three primary categories to consider: lease-to-own agreements, full-service leases, and operating leases.
In a lease-to-own agreement, the commercial trucking company and the truck manufacturer enter into a lease that terminates in a purchase. Typically financing at an expensive interest rate is involved, so it is not uncommon to build up a down-payment break-even point where you can no longer continue under the lease-to-own strategy. While most people consider lease-to-own to be a good way to acquire a newer vehicle where you pay off the vehicle while using it, it does pay to keep in mind that most lease brokers have relationships with lease companies, and that the lease may be subject to interest from the broker, which may exceed the interest of the lease company!
The full-service lease is similar to the lease-to-own in that there is a long-term commitment associated with it, usually years, but there is no intention to purchase the truck at the end of the lease. All maintenance and repair costs are covered. However, the lease payments are relatively high and must be continued, regardless of the condition of the vehicle, so you lose some advantages that you would have if you were an owner-operator.
Finally on the subject of leasing, the operating lease is a nearly low-risk financial move. The monthly payments are lower than with more conventional leases and the outfitting is less. There is no intention to purchase the truck after the lease term, so the entire value of the payments over the lease term is an expense. Operating leases are also stricter on mileage.

Legal Implications of Trucking Leases

The legal considerations in trucking leases will vary depending on the state or states in which an entity operates. For example, Wisconsin law does not require commercial motor carriers to enter into written contracts whereas Federal law under 49 U.S.C. § 14102 requires written contracts and written verification of insurance. Trucking companies must comply with both Federal and state law when drafting or reviewing leases or lease agreements with either employees, lessors or any other entity. The regulation of the Interstate Commerce Commission (ICC) requires "operating rights" and "equipment" leases to be in writing and details the minimum obligations for each. Prior to the enactment of the Federal Motor Carrier Act of 1980, commercial motor carriers were required to obtain ICC operating authority, pay state and federal fuel taxes, purchase ICC liability insurance, maintain certain records and file various reports (ICC 1980).
In 2015, there were approximately 3.4 billion interstate freight shipments equaling $700 billion dollars. The trucking industry was responsible for moving 70 percent of that freight. Typically, smaller motor carriers make up 90 percent of the trucking industry making these carriers vital to managing and maintaining freight movement in the U.S. This increases the need for review of the brokerage relationship between commercial motor carriers and shippers. Brokers and carriers are governed by the Federal Motor Carrier Safety Administration (FMCSA), an agency within the U.S. Department of Transportation that promotes highway safety. In regards to private carriage, Motor carriers may seek written contracts and are required by Federal law under 49 U.S.C. § 13102 to enter into written contracts with owner/lessors.

How to Negotiate a Trucking Lease

One of your primary responsibilities in negotiating an equipment lease for your trucking company will be persuading the lessor to reduce the cost of the equipment. This will often be influenced by the terms of the lease. For example, some equipment leasing companies offer a number of different terms. The two most common include:
The lessor will usually offer the lowest interest rates for the longest lease term. This is because leasing companies do not want to risk losing their money on the lease. If it is a high-risk contract, they will offer a shorter lease term in the hopes that the higher monthly payments will offset the risk. You can negotiate the terms of the lease agreement after you have negotiated a price, but it is also important to remember that some leasing companies will not decrease the price unless you are willing to accept the longer lease agreement term. If you are receiving quality equipment at a good price , it is typically worth it to go ahead and accept the longer lease. Another consideration to make is whether to negotiate for repairs and maintenance of the vehicle outside of the lease agreement or include them. While you may think that including repairs and maintenance for free is a good idea, it is often a sign that the leasing company does not have confidence in its own equipment. They would otherwise repair or replace equipment as necessary instead of providing free maintenance and repairs. Typically, it is best to agree to pay for your own maintenance and repairs so that the leasing company is not incentivized to place low-quality equipment at high risk. In the end, it is in your best interest to look out not only for your own best interests, but also those of the leasing company so that both of you benefit.

Pitfalls to Avoid While Leasing

Many small businesses enter into leasing or other types of contractual agreements without having a lawyer review the proposed contract prior to execution. Oftentimes an agreement will have hidden fees or clauses that could potentially be an issue later. While it is unlikely that a small business will likely be able to negotiate the terms that the other party unilaterally has presented, it is always a good idea to know what you are getting into.
A very common trap that trucking companies can fall into is typically referred to as the "bailment" or "gate" clause. These provisions are usually in the contract to avoid the trucking company’s responsibility for any damage to a customer’s load that may occur while the load is in the trucking company’s care. This may be phrased as something like "while a load is in a transporter’s possession the transporter is not responsible for loss of, damage to or delay in delivery of any load". The issue with this type of clause is a carrier’s insurance provider may not cover damage caused by such an event in which they have conceded liability via such a clause. This would leave the carrier potentially on the hook for a loss out of their own pocket.
The lesson here is to know what you are getting into prior to signing an agreement. Having a lawyer review a proposed lease agreement or any other contract before signing gives you the opportunity to discover potential pitfalls or to negotiate more favorable terms where possible.

Successful Trucking Lease Agreements in Practice

We have negotiated or reviewed many lease agreements for trucking companies. Here are some of the best practices we have experienced:
The Owner-Operator’s Own Entity
One of the greatest sources of trouble for truck owner-operators is a suit where the owner-operator has personally guaranteed the lease and there are several lessors and the lessor’s attorneys are trying to collect on the personal guarantee. The answer is to have the owner-operator sign his or her lease as an officer of their own company. It is best if the owner-operator’s company has no assets at the time but this should be discussed with the owner-operator’s accountant to avoid problems with the IRS.
Making the payment of all outstanding advances a condition of termination
Many times in negotiating a lease extension, the lessor will want all outstanding expenses paid. In longer leases where the business has been incorporated, consider selling the vehicle to the company for the unpaid advances. This leaves all the lessor’s interests intact while moving along to a new lease or carrier.
ABCs of Incidental Agreements
There are times when it makes great business sense to enter into incidental agreements, but you should not make the mistake of including them in the lease agreement. For example, as an attachment, where the lessor is agreeing to provide cargo and/or broker freight, then attach a contract to the lease. Otherwise, one could be signing up for years of indentured servitude in a spot market. The lessee can agree to be available for acceptance but, if refused, the business should not be forced to pull freight for less than costs.
Overlapping contracts
When a residual is attached to the lease agreement, the owner-operator and broker may not realize that the collateral comes to an end at the expiration of the lease agreement. That is because in many instances the residual is the same as the lease vehicle. Therefore, if the contract is extended even one day too long, the residuals do not transfer to the new owner-operator. We have found that if residual contracts are handled separately and do not overlap the lease agreement, the parties typically save significant amounts of money and time.
At conclusion of a lease, the owner-operator should always invite the underwriter to an informal meeting on how performance could be improved.

Predictions on Leasing in the Trucking Industry

As the trucking industry continues to evolve, so too does the landscape of truck leasing agreements. With the rise of technology and shifting economic factors, lessors and lessees are effectively redefining the leasing of commercial vehicles. Among the most anticipated trends is the likely move towards more flexible leasing agreements between lessors and lessees, which may include trial periods, shorter initial terms, and renewal options for one to three years. Along with the flexibility in record keeping and contracts, leasing companies can plan to take advantage of the changing technology by providing new reporting and compliance software in the future . Also of note is the ongoing impact of the COVID-19 pandemic on leases. The pandemic caused a shift in priorities for many companies, placing a greater emphasis on maintaining a healthy cash flow. In such times, leasing vehicles can help improve companies’ cash position versus purchasing the vehicle outright, since leasing allows companies to pay lower up-front costs. With some 7 million trucks on the road in the U.S., the demand for vehicle leasing will always be robust in trucking.