How To Navigate A Default Payment In Your Commercial Lease

If there’s a chance that you might default payment, there’s no need to panic because you can always come to a mutual agreement with your lessor and avoid serious consequences.

default paymentIf you have to default payment for monthly lease installments, there are certain steps that you can take to ensure that the situation doesn’t transform from bad to worse.

It is very important that you communicate with your lessor to prevent the situation from spinning out of control. At the beginning of your lease, your primary concern is to find flexible and affordable equipment financing.

The equipment leasing company’s main objective is to create a lease transaction that is profitable. When a payment default becomes inevitable, both you and your lessor’s concerns change.

You can both take the necessary steps needed to ensure that your business relationship remains intact and you continue without one party compromising or feeling like they are losing their investment. When communicating with your lessor and planning a recovery, it is very important that you appreciate their concerns.

How To Navigate A Default Payment

When you see that a default payment is inevitable, the first step that you should take is to notify your lessor. Many lessors will appreciate the fact that you alerted them and they weren’t blindsided. You should have a good explanation as to why your defaulting payment.

Your lessor may want a detailed account of your company’s financial situation and how you plan to make things right. You should consider generating financial projections because they will go a long way into convincing your lessor to give you ample time to execute your recovery plan.

Even though you are defaulting payment, you should try as much as possible to observe the terms and conditions of your lease. For instance, if your lease agreement requires you to provide periodic financial information about your company, then you should ensure that you turn in this information on time. Updating your lessor frequently will give them assurance that you are cooperating and working with them.

If need be, consider proposing a rent reduction for a term that will give you enough time to recover. Remember that the equipment leasing company is more concerned about how they will get their money and if they will benefit from your agreement at the outset of the lease.

Secondly, the equipment leasing company is worried about their collateral. Now that they have been presented with the problem of default payment, they will want to protect themselves from a loss in case your company does not make payments at all and repossession of equipment is necessary. By offering your equipment lessor a financial projection of your company, it will show them that your company will recover and you will be able to start making full monthly lease payments soon.

If possible, offer your lessor a personal guarantee, additional collateral or any other security that will entice them to accommodate you. If you are not sure of the likely duration of the default payment, you should ask for a short period of low monthly payments until you have properly evaluated the situation.

If you see that there’s no hope in recovering or you cannot continue making monthly lease payments, you can negotiate with your lessor for any one of the following things:

  1. Request the lessor to allow you to make reduced payments while you continue using the equipment until they can re-market it.
  2. Request for an equipment sale leaseback.
  3. Request to return the equipment and pay the balance in evenly distributed installments over a period of time.

If you have tried everything and nothing seems to work with your lessor, you should consider hiring a skilled attorney.

Final Word

Many lessors don’t like taking legal action against payment defaulters. If the situation seems salvageable, many leasing companies prefer to continue working with their lessees rather than go through an expensive and lengthy legal process. In fact, many leasing companies have their own in-house team that specifically works with clients who default payment.

Don’t panic if your company’s finances take a dip and you have to modify the terms and conditions of your lease. It is possible that you can reach a mutual agreement with your lessor but you should be prepared to hire an attorney.

For more information on navigating default payment, simply CLICK HERE.