The term “fair market value” seems straightforward enough, but it doesn’t offer much definition from a legal standpoint—a reality that can come as quite a shock to lessees when they receive “fair market” valuations that are much higher than what the equipment would actually cost to purchase on the open market.
When negotiating the end-of-lease buy-out terms for a lease agreement, lessees need to understand the specific definitions of fair market value within the contract. And they should insist on a valuation process that doesn’t give an advantage to lessors.
FMV Terms Often Favor Lessors
Equipment leasing is a highly specialized form of finance, and lessors have lawyers who are experts in equipment leasing draw up contracts that are advantageous to lessors—often in ways that lessees fail to realize because they don’t share the same level of industry experience.
For example, a contract that requires fair market value to be “mutually agreed upon” might seem like it protects both parties equally and gives both equal leverage in negotiating fair market value. But in such situations, if the lessee still needs the equipment, there will have to be undesirable extensions while negotiations are ongoing—giving leverage to the lessor. Even with a valuation mechanism in place, such as appraisal, the time element favors the lessor.
End-of-lease buy-out terms that define fair market value as “in place” value, as opposed to the “deinstalled” value on the open market, are another example of lease agreement language that comes back to haunt lessees. That terminology essentially means the fair market value is determined by the worth of the equipment to the lessee rather than its true secondary market value.
The bottom line is that if a lessee isn’t knowledgeable and attentive about the fine details of leasing contracts, a lessor can design a contract that defines fair market value in almost any way the lessor wants.
Experience Protects Against FMV Ambiguity
The best defense against adverse fair-market-value lease terms is to counter the lessor’s industry experience with comparable expertise. If an enterprise doesn’t have the in-house resources to successfully negotiate leasing contracts, an outside specialist in equipment leasing should be retained.
Beyond working to ensure a fair market valuation process that isn’t one-sided to the lessor’s advantage, equipment leasing experts can help in all aspects of negotiation. Equipment leasing costs can be significantly reduced by bringing in people who understand the nuances of the industry to assist with lease agreements.
