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EVERGREEN CLAUSES

The evergreen clause is a masterpiece of deception used by some leasing companies, brokers and commercial lenders. According to BusinessDictionary.com an evergreen contract is an “agreement between two parties that is automatically renewed (rolled over) after each completion or maturity period, until canceled by either party”. The way this is applied in equipment leasing situations is to provide the customer with a fixed price option to purchase the asset being leased once the initial term of the contract has expired and the customer has made all payments. This is usually negotiated before the customer has committed to the lease and is generally part of the customer’s economic evaluation and ultimate decision. The customer is even given a separate document that evidences they have the right to purchase the asset for a specific price, usually $1.00.

At the end of the initial lease term the customer will either remit a check for the additional $1.00 or other fixed price purchase option and send it with their final payment or inquire what they must do to obtain clear title to the asset and that’s when the BAD NEWS is usually disclosed. In either situation they may find that buried in the fine print are requirements that the customer should have NOTIFIED the Lessor of their intent to exercise their option and that notice should have been made in a very specific way and within a very specific time period. The agreement language usually requires the customer to send a CERTIFIED letter to the Lessor notifying the Lessor of their intent to exercise the option and that letter must be received by the Lessor not less than 90 days and not more than 120 days prior to the expiration of the Lease. Typically this language is ‘hidden’ in one or two separate sections of the lease and only when read in conjunction with each other does it become clear what must be done to exercise the option. If the customer fails to do any of those things exactly as outlined in the lease, the lease automatically renews for an additional 12 months and the customer is legally bound for 12 more payments than they originally contracted for. Assuming the original term of the lease was between 36 and 60 months the customer can end up paying between 26% and 38% of the original asset cost in additional payments. THAT’S IN ADDITION TO ALL THE INTEREST AND PRINCIPAL THE CUSTOMER HAS PAID FOR THE LAST 3 TO 5 YEARS.
We offer this informational document as our opinion based on over 40 years of experience in the commercial finance industry and suggest that you to use it as a part of your decision making process. As with all important decisions, especially financial decisions, we also suggest that you consider all aspects carefully and consult with your attorney or accountant or other party who is knowledgeable about financial matters when considering entering into a legally binding agreement.

About Charter Capital

Charter Capital is a family owned and operated commercial finance broker. Since 1977 we have been providing businesses just like yours with equipment and technology leases and loans that are right for their specific financing needs. Nothing we do is standard.