1. Equipment Lease Issues The University of Texas System Office of General Counsel Scott Patterson, Attorney

2. Equipment Lease Issues  Unconditional Payment Obligations  Creation of Multiple Leases  Dependent Lease Provisions  Acceleration of Payment  Lessor as “Middleman”  Addition of Leased Items NOTE: NOTE: These issues can also arise in “Rental Agreements.”

3. Equipment Leases Unconditional Payment Obligations PROBLEM: University is unconditionally obligated to pay Lessor (or Lessor’s Assignee) even if Lessor in breach or if leased equipment is defective. REASONS: Equipment Obsolescence, Lessor’s Sale of Payments to Factor RECOMMENDATIONS:  Try to rent rather than lease in order to be able to terminate payment obligation.  If equipment cannot be rented:  consider purchasing the leased equipment, or  reduce the term of lease as much as possible.

4. Equipment Leases Creation of Multiple Leases PROBLEM: Lease language divides lease into multiple independently enforceable agreements:  Separate leases for different types of equipment.  Distinct contracts for equipment and maintenance. REASON: Limits University’s recourse against Lessor in the event of Lessor’s breach. RECOMMENDATION: Try to delete or modify so University and Lessor enter into a single lease agreement – provides University with more leverage in the event of Lessor’s breach. (However, beware of unconditional payment obligations in lease.)

5. Equipment Leases Dependent Lease Provisions PROBLEM: Lease limits/removes Lessor’s obligations unless University obtains another product or service from Lessor (e.g., maintenance and support). RISK: Can be difficult to spot; typically appear in “cross references” between two lease provisions. RECOMMENDATIONS: Determine if reasonable. If not reasonable, try to eliminate. If possible, point out to the Lessor the lack of a relationship between the dependent provisions.

6. Equipment Leases Acceleration of Payment PROBLEM: Lease requires University to make all past due and future payments under the lease if University defaults under the lease. RECOMMENDATION: Try to delete acceleration provisions so that University is only responsible for payments as they become due. However, note that Lessor may refuse to enter into such a lease.

7. Equipment Leases When Lessor is a “Middleman” PROBLEMS:  Lessor does not warrant or maintain leased equipment. Instead, such warranties and maintenance are to be provided by a third party (e.g., equipment manufacturer.)  Leased equipment includes software that is owned and licensed by a third party, not by Lessor. RECOMMENDATIONS:  Ensure that all third party warranties and licenses are transferred to the University in writing.  Ensure University has right to directly enforce all warranties and licenses.

8. Equipment Leases When Lessor is a “Middleman” RECOMMENDATIONS (con’t):  Ensure University has right to directly request performance of maintenance.  Try to make Lessor responsible for putting such warranties, licenses, and maintenance in place.  Lessor should notify warrantor/licensor.  Lessor should make all payments to such third party warrantors/licensors/maintainers.  Ensure that Lessor is required to assist the University in  enforcing licenses/warranties  ensuring correct performance of maintenance.

9. Equipment Leases Addition of Leased Items PROBLEMS:  Leases permits new items to be easily added to the lease.  Lease is a “Master Agreement”:  Lease terms and conditions are set forth in “Master Agreement”.  Actual equipment leased is identified in additional documents that are entered into under the “Master Agreement”.

10. Equipment Leases Addition of Leased Items RISKS:  Existing lease terms may not be applicable to the equipment being added to the lease.  Documents in which the newly leased equipment are identified may include new contractual terms.  Lease-purchases over $250,000 or for a term longer than 5 years must be reviewed and approved by the Bond Review Board (Chapter 1231, Texas Government Code.) This step may be missed when new equipment is added to the lease.  May result in the parties entering into numerous additional documents in order to add/delete equipment under the lease.

11. Equipment Leases Addition of Leased Items RECOMMENDATIONS:  Only enter into leases that specifically identify the equipment to be leased and the term of the lease.  Delete language permitting equipment to be added to the lease in the future.  If additional equipment is to be leased from that Lessor in the future, use a lease previously executed with that Lessor as a starting point for development of the new lease.