How to Break a Capital Lease

Capital leases are a way for businesses to rent equipment or storage space without being considered the legal owners. The businesses have to pay their rent for the length of the year, whether it's for one or two years. You can terminate your lease either before or at the term's end. Know what's right for you when you terminate your capital lease either early or at the end.

Instructions

Difficulty: Challenging

Things You’ll Need:

• Attorney
• Cost analysis
• Lease termination form
• Termination notice
• Affidavit

1. Hire an attorney that specializes in capital leases or lease termination. Keep your attorney in the loop from when you buy your capital lease until the day you terminate it before or after the lease term ends.
2. Have your attorney write up a termination notice to inform the company you're leasing from that you're terminating your capital lease. Give your leasing company time to find a buyer or tenant to lease the product to. Attorneys recommend giving your lender from 30 to 60 days notice of your capital lease termination. If you need to terminate the lease early, contact your leasing company right away and explain your reasons for early termination. Get the termination paperwork and negotiate termination terms immediately.
3. Meet with your attorney and the lender to discuss terms of the lease termination. Discuss how you'll pay off the lease. You can either purchase the lease at 10 percent of the original cost or sell the product through sales-leaseback to another company. You can choose these options once your leasing terms ends. If you need to terminate your lease early, sell the lease back to your lender. Once terms are agreed on, draw up a lease termination agreement stating all the terms.
4. Sign your name on the lease termination form and have your attorney file it with the court. Return the property you leased back to the proper owner within two days of the lease termination. Also sign an affidavit with the leasing company verifying that you returned the product as legal confirmation and preventing any issues later. Wait for at least seven days for the lease termination to take effect before purchasing anything else.

Tips & Warnings

• Choose a lease that's tax exempt or not. If your business focuses on municipal work, you can buy a tax-exempt or taxable municipal bond. Once the lease ends, you can either buy the product outright or terminate the lease completely. If the lease isn't right for you, contact your attorney and the leasing company immediately to terminate the lease. With municipal leases, you can only use about 5 to 10 percent for private purposes, with the rest invested for public means.
• Expect to pay a fee if you decide to terminate your capital lease before it's done. Sometimes you must pay as much as 80 percent of your lease. But you may be able to deduct part of your termination fee from your taxes.
• Don't terminate your capital lease until you know for certain that you no longer want the lease. Draw up a cost analysis to see if owning or giving up the product benefits or damages your business' finances.