If you are considering leasing equipment for your business—maybe you’ve even had discussions with an equipment leasing company or have a proposed contract on your desk—you want to look closely at the language of the lease. It’s a fairly common practice to include an “evergreen clause” in an equipment lease. Essentially, the evergreen clause automatically extends the lease unless you notify the lessor (the equipment leasing company) within a specified period of time before the expiration of the original term of the lease.
An evergreen clause can prevent you from terminating a lease and returning lease equipment, but it can also interfere with efforts to purchase equipment that you’ve been leasing. For example, you may sign an equipment lease for a period of three years, knowing that you have the right to buy the equipment at the end of three years by paying the fair market value of same. That may be a good deal for you. However, when it comes time to make that payment, you may learn that the lease automatically renewed for another three year period because you didn’t notify the lessor of your intentions to purchase the equipment in a timely manner, pursuant to the terms of the lease agreement.
Under current law in New Jersey, it is not illegal to include an evergreen clause in a contract. New Jersey Assemblyman Daniel Benson has been trying for a number of years to outlaw the practice, without success.
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