What is a Trucking Lease Agreement?
What is the trucking lease agreement? You may have heard the term but are not exactly sure what it is. Perhaps you have just signed one and wonder whether it is in fact a valid contract.
A trucking lease agreement is a written agreement between a trucking company and a driver or lessee over the terms of driving either a truck that is owned by the carrier or another company such as a freight broker. The trucking lease agreement can be for the driver to drive the truck on a full-time or part-time (leased-on) basis, or may operate on a more independent basis where there might be no requirement to pick up a load each week. In all cases however, a trucking lease agreement is an attempt to define the relationship of the parties and possibly some of the terms of the arrangement.
If the trucking company is considered the employer of the driver, the trucking company must handle all of the appropriate tax withholding and reporting and employee benefits handling. If the trucking company is a co-joint employer , it must provide those items as well. A joint employment relationship may exist when a company has no part in the hiring of a worker, but exercises financial control over that worker and/or the worker is economically dependent on the company. It is also possible for the trucking company to be an independent contractor to the driver if the driver is deemed to be an independent contractor. The trucking lease agreement is a way for the company to try and make the relationship clear, but the agreement may be legally challenged if the actions of the company and driver suggest otherwise.
Obviously, the trucking lease agreement makes sense if there is either an independent contractor arrangement or division of responsibility in a co-joint employment relationship. The difference between legitimate use of trucking lease agreements and attempts to avoid taxation may be a question if the industry usage does not reflect the agreement and/or company policies regarding drivers.
Components of a Trucking Lease Agreement
A trucking lease agreement can include a wide variety of conditions that govern the lease on the truck, the rights of the lessor of the vehicle and the rights of the lessee. There are four key components that every trucking lease agreement ought to have to ensure the satisfaction of both parties:
- Term and use of leasing vehicle: This includes the period during which the vehicle will be leased, such as two years, five years, or another term. It also includes how the vehicle can be used (e.g. for transportation of goods for commercial use under said entity’s name) and any limitations placed on its use (e.g. it cannot be used to transport goods outside the continental United States). Other terms can include what duties and responsibilities the registry of the vehicle falls under, whether maintenance costs are covered, etc.
- Payments and filing fee: There must be a clear stipulation of the lease payments: the amount due on what date. Some agreements may be contingent upon mileage driven or fuel usage. A consistent payment schedule must be included. There is also a need for the filing fee for the leasing agreement through the Secretary of State’s office. This fee is a public record and needs to be put on file so a third party can see the document.
- Termination terms: It’s important that in order to cancel the lease, the party must fulfill certain requirements in order to do so lawfully. If you attempt to terminate a contract prematurely without complying with its requirements, you may be subject to penalties. There must be a clearly defined process that must be fulfilled in order for either party to lawfully terminate the leasing agreement.
- Other provisions: Every trucking leasing agreement is different, but there are a number of clauses that should be obvious for just about any agreement. This includes an explanation of how and when the leased vehicle will be returned to the lessor, a description of the condition in which the vehicle must be returned (including any damages necessary to be repaired), provisions for who is responsible for paying the cost for those repair expenses, and whether or not any interest will accrue on repayments for amounts that are owed to the lessor.
The above components are generally standard for most trucking lease agreements. It’s important that you include all four, whether you’re working for the lessor or the lessee.
Types of Trucking Lease Agreements
Lease-purchase agreements, often called "lease-to-own" arrangements, are designed to provide the lessee with an option to purchase the vehicle at the end of the lease term. These types of leases are typically termed "financed" leases because the lease payments are really "principal and interest" payments circumventing the need to finance the purchase of the truck or equipment. These type of leases can also make it easier for an owner/operator to establish credit while at the same time allow him or her to avoid some up-front costs without having to wait to accumulate an appropriate down payment.
Full service leases are an all-inclusive lease that include the cost of maintenance, repairs, tires, etc. While full service leases save the owner/operator from these costs, they can add significantly to the monthly rental payment by $200.00 – $800.00 or more per month.
Finance leases are similar to operating leases in that the lessee does not have an option to purchase the transportation equipment, but are economically similar to sales transactions because the transaction is intended to result in a purchase by the lessee and the lessor expects the lessee to assume the risks and benefits of ownership. Whereas the owner/operator does not acquire title to the equipment, he or she has the risks and benefits of ownership. These leases are often referred to as "true leases" by experienced transportation lawyers.
Utilitarian leasing refers to leasing arrangements such as hour leasing and trip leasing. These types of leases can be useful for loads that require special handling or special equipment. Hour leasing is typically used where the owner/operator is paid based on the hours that the tractor and trailer are in use. Payment is typically based on a flat hourly rate or on distance traveled.
Pros and Cons of Leasing a Truck
While leasing arrangements are perhaps the most common form of lease (and have been back as far as the 1960s, if a recent court decision is to be believed), they do have their advantages and disadvantages. From a purely practical standpoint, leasing gives new owner-operators a way to build up a credit history and obtain a good commercial credit rating. For some companies, this is the only way to obtain the latest model trucks with the free technology upgrades a new truck entails, such as sensors and GPS. A new truck may also be more fuel efficient and cause fewer maintenance hassles. Many leasing arrangements offer flexible terms from weekly to a long-term lease. However, Owner-Operators should be conscious of whether the payment is within their budget; an unexpected empty week with no income can make a binding lease problematic for any owner-operator.
Another practical matter is being sure to read the terms of the lease to determine whether penalties apply for returning the truck early, or for being a day late with a payment, regardless of the circumstances surrounding it. The last thing any owner-operator wants is to get hit with excessive penalties for circumstances beyond his or her control.
On the downside, leasing a truck can eat up to 20 to 30 percent of an Owner-Operator’s income to operate the lease. Some owner-operators have complained that the excuse provided by the motor carrier for its receipt of a portion of the owner-operator’s pay is that the motor carrier is repaying the lease payments, which is very much similar to the lease and sublease situation that the Federal Motor Carrier Safety Administration sought to regulate through the Rule the agency adopted in 2015 (but which was struck down by the District Court in June of 2016). Motor carriers in these situations will likely claim that all terms and conditions of the actual lease govern the lease, but Owner-Operators should ask the right questions before entering into these arrangements, such as:
Some Owner-Operators have also reported that while leasing arrangements affordable, they result in taking home lower income than a purchase plan would. For instance, one owner/operator has stated that with a purchase arrangement, he earned $1,200 take-home pay cost and weekly payments of $478 including maintenance costs. In contrast, the owner/operator claimed to earn $800-850 take home pay and $429 weekly payments when financing a truck purchase under the lease program.
Another owner/operator stated that the lease payments are lower than the payments for purchasing a truck, and Owner-Operators should be aware that motor carriers often manipulate their own accounting processes to benefit their own corporate structure, not their drivers. Some owner-operators have claimed that they when the motor carrier receives 30 percent of their pay. while charging them only 12 percent, the motor carrier keeps the excess (18 percent) for itself as reimbursement of alleged expenses, thereby competing with its own Owner-Operators.
Accordingly, Owner-Operators should be careful to compare the program to which they are being invited with other comparable programs of competitors and to compare it with outright purchase plans before deciding how to proceed. In addition, current market conditions, including the price of diesel, must be considered, as should the work location and average trip length.
Legal Issues Related to Trucking Lease Agreements
Trucking lease agreements are governed by a host of federal and state regulations. At the federal level, compliance with FMCSA regulations is mandatory. Carriers that fail to comply with the FMCSA requirements can be subjected to stiff penalties for violations. A lessor may also be liable, under certain circumstances, for some FMCSA violations of the lessee. As a result, it is important for a lessor to know whether the lessee is a CARRIER or a BROKER under MSHA and take measures to protect its interests.
If the lessee has recently had its operating status changed from carrier to broker, or vice versa, the contract should include a clause stating that the carrier is responsible for providing copies of any operating status changes that occur in the future. Like any other contractual relationship between a truck lessor and lessee , the terms of the agreement should be reviewed for compliance with state and federal regulations and any other applicable laws, including minimum insurance coverage and requirements.
A comprehensive trucking lease agreement will go a long way in protecting your interests. Nevertheless, there are a number of possible pitfalls when leasing trucks to a trucking company. In the event a Lessors finds itself embroiled in litigation, it is very important that it seek competent legal representation to assist in the recovery of the asset. If a Lessor can prove possession of a valid lease, the lease agreement may provide sufficient grounds for repossession of the truck without having to file a lawsuit, although depending on the facts, a lawsuit may be necessary. We routinely assist carriers in obtaining their assets after a litigation claim has been filed. It is not unusual for collection and litigation matters to last a year or more.
How to Negotiate a Trucking Lease Agreement
When it comes to negotiating the terms and conditions of a trucking lease agreement, it is important to have an experienced trucking attorney looking out for your best interests. Navigating a trucking lease agreement can be a tricky thing to do for a lot of "regular" people who do not deal with transportation issues on a daily basis. You want to ensure that all of the terms of your trucking lease agreement are in compliance with any regulations that may be applicable to you and/or your business.
Here are some tips for negotiating a trucking lease agreement:
- Look for indications that may suggest that a leasing company may not be treating you fairly and/or honestly.
- The costs of the leasing transaction should be expressed as a single cash cost or as a total price for all items.
- There should be no additional unjustified costs not specifically disclosed in your leasing agreement.
- The fees associated with the leasing agreement should be comparable to those charged by other lease providers, whether in the local area or nationwide.
- Be wary if leasing agent actively discourages you from seeking professional advice regarding the leasing transaction.
- Make certain the information a leasing agent provides is complete and accurate.
You should ask yourself the following questions before signing the lease:
• Do I have a clear understanding of my rights and obligations under this Leasing Agreement?
• Do I fully understand how the Leasing Agent calculates the cost of the transaction?
• Is the cost of the transaction disclosed to me in the Leasing Agreement?
• Does the Leasing Agreement clearly disclose the fundamental terms of the transaction?
• Is the Leasing Agreement free of any unfair or deceptive terms or practices?
• What are the costs of leasing?
• What other charges may arise under this Leasing Agreement?
• What information do I need to provide to get started, and when?
• If I have a problem or question about this transaction, whom should I contact?
• If I have a problem, what steps should I take to resolve it?
• How will I find out how much my payments will be: Monthly? Weekly? Semi-Annually?
• When is the Leasing Company entitled to demand payment?
• What happens when I make all of my payments, and how will I know when I have made them?
Addressing these questions will help you to ensure that you are crystal clear on the terms and conditions of your trucking lease agreement. If you have any questions at any time, reach out to an experienced transportation attorney.
Common Pitfalls
Signing a trucking lease agreement without carefully reviewing and negotiating the terms is a common mistake. Always take the time to read the contract in its entirety. If there are any portions you don’t understand, get clarification before adding your signature.
Don’t simply agree to the first offer you receive. Shop around and compare offers from different leasing companies . Pay attention to how each agreement addresses liability, insurance, maintenance and payment amounts.
If there are terms in the agreement that you do not like or that make you uncomfortable, do not sign the agreement unless those terms have been clarified or updated. You are the one using the truck so you should feel comfortable with all of the terms outlined in the agreement.