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Evergreen Fees On Equipment Leases, And How To Avoid Them

Evergreen fees on equipment leases, and how to avoid them

An evergreen lease contract automatically renews after each completion or maturity period, until canceled by one of the parties. While positioned by the lessor as a convenience for prolonged use of equipment assets without formal lease extensions, it also is a tactic to get lessees to pay more over time than the equipment is worth if purchased outright. 

Equipment lease agreements provide the lessee with a fixed price option to purchase the asset at the completion of the initial term of the contract and the customer has made all payments. In many cases, the burden is on the lessee to notify the lessor of their intent to exercise the purchase or partial renewal option, and oftentimes notice should be made in a specific way and within a specified time period. For example, the lease agreement may require the lessee to provide notice of intent to the lessor via certified letter 120 days before the expiration of the original equipment lease agreement. If the lessee fails to provide notice within those parameters, the lease will automatically renew for an additional term(s). The end result: By making payments beyond the original contract terms, the lessee pays significantly more than the equipment is worth.

How to avoid overpaying for evergreen equipment leases

There are three ways to avoid future overpayment due to evergreen equipment lease agreements:

  1. Adjust corporate policy to universally avoid signing new equipment lease agreements with evergreen clauses
  2. Ensure the lease data in your lease administration system is complete and accurate, including critical dates related to evergreen clauses and lease expiration dates
  3. Ensure your lease administration software solution is capable of sending critical date alerts, both via email and on-screen alerts to ensure action is taken to circumvent automatic renewal without careful consideration of the options

Learn more about how CoStar’s lease administration software manages creates and receives notifications, payment obligations, views updates across entire lease portfolio, sets workflows quality control and more.

Learn more about what makes a good equipment leasing program.

Learn more about the impact of ASC 842 on leasing and financing equipment.

Matt Waters, CPA

Lease Accounting Subject Matter Expert with over 15 years of Management Experience in Accounting and Finance