Lease Break Scheme
 

Lease Break Scheme

Equipment leasing - the hidden costs

Equipment leasing is a common and cost effective method of equipment finance. However, when evaluating the costs of loans, leasing or outright purchase, most companies are not aware of the hidden cost of secondary rentals that are often included in equipment leasing agreements. Our lease break scheme can save thousands of pounds by cutting secondary rental leasing costs.

Equipment leasing - primary rental

Every year thousands of UK businesses buy equipment using finance leasing, spreading the payments over periods ranging from five to ten years. This initial period is known as the primary lease period during which the business pays a series of primary rentals to the lender covering his cost of capital and profit margin.

Equipment leasing - secondary rental

At the end of the primary period the secondary rentals (or peppercorn rentals) start and continue for as long as the business retains the equipment, which could be another 20 years. These secondary rentals are typically set at 1% of the original cost of the equipment which does not sound much but can be significant in relation to the current value of the equipment; we have come across businesses paying over £60,000 per annum in secondary rentals, some for more than seventeen years!!

Secondary rentals are pure profit for the finance companies but are totally avoidable using our lease break scheme. During the last ten years we have saved many businesses hundreds of thousands of pounds on secondary rental payments.

Equipment leasing - lease break scheme

All modern finance leases incorporate a sales agency clause allowing the lessee (i.e. your business) to sell the equipment on the lenders behalf thus bringing the lease to an end. A final payment of 1% to 5% of the sale proceeds is payable to the lessor.

In the majority of cases however, the equipment leased has a productive life well in excess of the primary period and you want to retain it, not sell it. But you also do not want to pay any secondary rentals either. This is where our lease break scheme can help.

Making use of the sales agency clause you sell the equipment to Nationwide Asset Finance Limited for its current value and enter into a short term hire agreement (typically three/six months) at the end of which title to the equipment passes to you. No more secondary rentals are then payable.

Equipment leasing - Lease Break Example

Equipment leasing - Lease BreakA major Plc bought a computer system seven years ago for £1m on which it was paying secondary rentals of £10,000 per annum even though the equipment's current value was only £40,000.

Step 1

Company A (the major Plc) sold the equipment to Nationwide Asset Finance Limited for £40,000 and paid 2½% of the proceeds to the leasing company. The lease is now broken and no further secondary rentals need be paid.

Step 2

Nationwide Asset Finance Limited entered into a short term hire agreement with Company A for £40,000 plus its fee of £10,000 (i.e. one years secondary rentals) with repayments as follows:

  1. £45,000 on signing the agreement
  2. £5,000 three months later

In effect Company A pays 2 x £5,000 the rest being a contra to the invoice raised in Step 1.

Note:

  1. In arriving at the current market value for the majority of equipment our experience is:
    • 4% - 8% of original cost for equipment 5 - 7 years old
    • 1% - 4% of original cost for equipment over 7 years old
  2. Title to the equipment passes on payment of the final payment (i.e. at Step 2ii)

All we need at this end is copies of the leases which are already in their secondary periods or are due to mature in the next twelve months. We can then sweep up the former on an initial agreement and make appropriate diary notes for the latter.

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