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Negotiating Equipment Leases: A Lawyer's Perspective

I ran across a funny cartoon a few years ago in which one business man was holding a gun on the other.  The caption read “I am now ready to negotiate.”  

In equipment finance negotiations, things are likely to run smoothly and the results to be favorable if the leasing company has all of the power, or if the lessee simply does not bother reading the documents.  Unless one of these situations is true, however, negotiations are likely to require strategy and tactics.  This article will review equipment finance negotiations in terms of general negotiating rules and advice for lawyers and their clients.

ROLE ASSIGNMENT/ GROUND RULES

A lawyer I knew 30 years ago had a motto: “lawyers talk to lawyers, businessmen to businessmen.” This was long the paradigm, but it has eroded in recent years, especially for middle-market transactions. Still, assigning roles at the outset of any negotiation is essential. A few suggestions:

It is indeed best for the lawyers to stick to the legal issues and not waste time showing off by fussing over pure business points. Most experienced counsel know the difference, but it is up to the businessperson to identify the issues he or she will handle directly with the lessee. Do not let your lawyer make than decision unless you are sure they are experienced. If so, give them clear directions and parameters.

Always decide how much time and money the negotiation is worth and let the lawyer know in advance. Do not be afraid to divulge your strong and weak points, giveaways and key issues. If you do not trust your lawyer with this information, get another lawyer. If you think you will get a better deal by misleading your lawyer, find a new line of work.

Remember: there is no “right” and “wrong” no matter how you yell about it at the table or over the phone. We are talking deals, not laws. “Market” is an amorphous concept at best. Some say negotiating in not about winning; this writer disagrees. It is about defining winning according to what the client needs and wants most and the cost-effectiveness of obtaining those goals.

STRATEGY

Good negotiators know the difference between strategy and tactics.  Strategy is similar to planning a military campaign.  It is best done before negotiations commence and should only be changed when circumstances clearly dictate. In order to formulate a good strategy, it is essential to know ones goals; in order to effect that strategy through good tactics it is necessary to keep them in mind.  Obviously, closing the deal on terms as close to those presented by the lessor is the major overall goal.  Prioritizing the lessor needs, however, may be essential.  

For example, lessors relying on end-of-term residual value often find negotiations regarding the condition of equipment, place of return and price of purchase options to be the difference between profit and loss.  Lessors who are engaged in full payout leasing, on the other hand, are often more concerned with assuring themselves the payment of all rentals despite casualty or other circumstances that could interrupt rent flow.  

A necessary second step in developing a strategy is to attempt to identify the goals and priorities of the lessee.  Determining points that are essential to lessees often results in successful tactics in proposing trades. It makes no sense to argue with a lessee over issues that it must win to be satisfied with the transaction (except as a means of increasing the lessee’s willingness to give up other issues). If the must-haves between lessee and lessor match up badly, the negotiation may be doomed from the start.

Another key is determining the relative power positions of the parties. What is the lessee’s (or lessor’s) sensitivity to timing? What are the lessee’s alternatives? How attractive is the competition or the option of paying cash? There are several ways to obtain this information, including approaching the vendor, checking past lessee transactions and  reviewing the RFP or RFQ, if any.  The vendor is sometimes in a position to advise as to specific concerns the lessee may have and thus act as a somewhat benign spy in the entity camp.  

Finally, the lessor must try to guess how aggressive the lessee intends to be in the negotiations and whether to meet it head-on, take advantage of a weak negotiator and be aggressive, or patiently establish that the lessor is reasonable and “just wants a fair deal.” Tactics to be pursued should support the strategies adopted, but lessor must always be prepared to change tactics if the situation requires.

TACTICS

The tactics to be used at the table should always be consistent with the strategy set before any meeting or telephone negotiation.  Tactics also often involve assembling information that might not routinely be introduced at any meeting.

For example, does the party representing the lessee have sufficient authorization and power to make deals?  This can be the first question asked at the table, but it is better if discussed before the meeting to ensure that the meeting does not begin with embarrassing the other side.  Negotiating with a party that does not have authority should be avoided if at all possible as such a party can only take, but never make, significant concessions.  

In equipment finance terms, this could be somewhat more complicated than it may appear.  Even a senior vice president who appears to have authority may defer to someone from treasury or feel the need to call in a senior officer prior to making a final decision.  Putting too many facts and options on the table too early can result in empowering and otherwise weak negotiating partner.  This is not to say that information should not be revealed or that candor and openness are not advisable.  The information to be released, however, should be carefully screened and the release timed.  

Lessors often find it useful to begin with points that are important to the lessee and dig in, indicating a willingness to compromise but identifying them as important to both parties. To the extent it is possible to hold off on the most serious lessor concerns until the lessee is somewhat disheartened by the early negotiations, the lessor may find that the lessee is relieved to find the lessor willing to trade for points it actually needs to win.

It is important, however, never to leave the biggest issues until last, conceding or compromising on points important to lessee and then having nothing to trade. If it is possible to do the reverse and address lessor issues first AND resolve those issues, gains can be made in favorable compromises when the lessee’s back is to the wall.

Other tactics are matters of style. Some negotiators prefer to dig in on whatever issues arise first, even if they are minor ones. This sets the tone of a tough fight and shows seriousness on the lessor’s part. Later concessions and compromises are more appreciated.

Where the lessee presents an aggressive draft or comments on the lessor’s document
starting with a point the lessor knows it will win is a good idea, embarrassing the lessee if it tries to fight. For example, lessee counsel arguing over the hell or high water clause or warranty disclaimer can be reminded gently but firmly that the lease replaces bank financing: if the equipment does not work, the bank is not going to allow set off against its note.

On the other hand, sometimes the better tactic is to begin with minor concessions or compromise proposals that make sense for both parties. This can defuse a potentially rancorous negotiation. For example, where lessee counsel balks at the breadth of the general indemnity, allowing an exception for gross negligence or willful misconduct by the lessor may be a good way to cool down the negotiations. Similarly, contest rights for tax indemnities, “reasonable” attorneys fees and such may be given from the standpoint of trying to be reasonable and get a deal done, while focusing on what one client calls “giving the sleeves from my vest.”

A similar tactic is to solicit questions from the other side as to what the lessor may be able to offer in the way of options and how it may be able to assist the lessee in framing its own priorities.  This will both reveal the lessees particular needs and place the lessor in an advisory position as well as that of an adversary.  For example a lessee concerned about security issues will welcome advance notice of inspections.

This strategy leads to the concept of making an offer that is educational and informative as well as competitive.  For example, noting that lessee in its earlier or most recent communication evinces a need for early termination might result in offering an early buyout option as an alternative to the traditional termination with a substantial penalty.  By explaining the difference between the classic early termination, requiring the customer to locate a new buyer and cover any shortfall and a buyout option that permits the customer to purchase the equipment and then sell it at its leisure may at once relieve the lessors anxiety over complications in the termination process, maximizing predictability and posturing  the lessor as a “problem solver” or “financing partner”.   

Revealing information regarding the lessors own priorities may elicit information from the lessee at low costs.  For example, acknowledging that the lessor does not wish to have the equipment back and be required to remarket it if there is a profitable alternative can lead the lessee to reveal its long term intentions for the equipment.  Obviously, this can backfire.

Other tactics are designed to avoid the breakdown of negotiations.  These include:

Asking provocative questions such as “under what circumstances would you consider….?” This often catches business negotiators short as they begin to assemble their wish list for trade items.  

Another possibility is to have in mind back-up positions that can be offered in the event there are language problems.  

Experienced counsel may also be able to agree in concept to points that can be drafted favorably without going back on the original deal. By conceding or compromising generally but keeping the drafting duties,  good counsel can win back some of what is lost.

One interesting variation is to stress to the lessee terms it will understand such as “total cost of ownership”. As many companies are advised by consultants and senior management to focus on these concepts, a provider who approaches from the same avenue may find the going easier.  In leasing terms, “total cost of ownership” would include the cost of maintenance, taxes, the time value of money, the cost of dedicated personnel and the dollar value to the availability of upgrades, refresh and other possibly-available options.  Looking at the lessors strategy and priorities from the lessees perspective may result in finding that a lessor is in a position to assist in covering some soft costs by financing them, reduced taxes or other expenses through structuring, changing the site of delivery, or other actions or possibly adding such as the preparation of property taxes to relieve lessee costs and gaining competitive advantage over other leasing companies.  

Where there is a particular person who is causing the lessor headaches by being aggressive (often lessee counsel), there are tactics to marginalize this person within the framework of the lessor’s strategy. If the lessor has adopted a soft approach, it is possible to use humor or a well-placed sigh to make the aggressive negotiator seem an impediment to closing, and actually acting against the lessee’s best interests. Throwing a few reasonable compromises at someone who is unwilling to compromise can paint the troublemaker in a bad light with his clients or bosses.

For example, where the lessee’s negotiator is insisting on no return obligations, the lessor might throw out several compromises: Deliver within an agreed mileage? Pay the cost and the lessor will arrange redelivery and take the risk of the return? Share the cost and continue the insurance? Agree to pay a pre-set delivery charge and avoid cost increases? If nothing works, explaining that the rate will be affected by the anticipated residual value and that the residual is affected by return costs may seem logical. Noting that the lessee can control disconnection, packing and return if it agrees to standard language, rather than having the lessor’s representatives come on site and disrupt operations may impress the negotiator’ superiors (remember always to have the actual decision maker present).

The reverse may also be true if the aggressive negotiator is simply not experienced, smart or “good” enough to back his aggression with good ideas. Meeting such a person head-on with better logic may stop a bully the old-fashioned way: by punching him in the nose. Depending on the lessor’s faith in its own or its counsel’s abilities at the table this may be the most cost-effective way to proceed.

Conclusion

As any experienced businessperson knows, lawyer-to-lawyer communication is often an expensive proposition. It is often the fastest way to resolve issues. The key is to manage the roles of lawyer and lessor so as to hold down costs while moving the deal to a favorable close.

Before signing off, I suppose being a truthful and ethical CLP, I must warn the reader that for all this planning and 37 years of experience, I do not believe I ever won an argument with any of my children. I have no idea how my 5 year-old got to be such a skilled verbal sparring partner (yes, he probably inherited it from his mother) but I hope he manages to hang onto the skills long enough to get me into a choice retirement home at half price.