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Early exit from a leasing contract

07.04.2020 Written by Tanushev

Each lease agreement prescribes a fixed term during which the lessee is entitled to use the leasing asset with the liability of paying /usually monthly/ certain leasing installments. At the same time, sometimes circumstances arise in which the lessee wishes to prematurely terminate his commitment – the payment of the lease payments. In short – early exit from a leasing contract. This occurs most commonly with leased cars.

There are several different ways to get out of a lease early. They are determined first of all by the lease clauses, the type of lease, the stage of the repayment schedule and the leasing practice. The lessee needs to find the solution that is most suitable for him – the fastest, cheapest, and maximizing his financial interest.

Here are the different options:

Early exit from a leasing contract

  1. Delinquency under the lease agreement

If the lessee has difficulty meeting the monthly lease payments (his ease commitment) the worst-case scenario is allowing for delinquencies under the leasing contract. On the one hand, delinquencies incur additional costs such as penalty interest, repossession fees, enforcement fees. On the other hand, they antagonize the lessor and deprive the lessee of any opportunity to preserve his financial interest – the acquisition of the car or the possibility of recovering part of the paid sums.

This scenario is best to be avoided. Even with the inability to pay the monthly installments, the lessee should immediately enter into a dialogue with his lessor and explore any of the options described below.

  1. Early return of a lease car to the lessor

Under this scenario, the lessee will no longer be able to use the lease car, but there will be no commitment to pay future installments.

The terms of the leasing contract must be checked again. It is quite possible that there will be arrangements for the early return of the car and termination of the lease. With operating leases, this is almost certain. In the absence of explicit conditions, the lessee will have to ask the lessor for such an opportunity.

This option (if existing) will be accompanied by the payment of certain fees for early termination of the lease. The reason for these fees is that the lessor bought this car because the lessee wanted it, not because he wanted to create his own fleet (Elon Musk makes an exception) and there will be an additional risk for remarketing should the car be returned prematurely.

The lessor will have a harder time agreeing to the early termination of the contract and the return of the car at the beginning of the lease – for example during the first 12 months. The return of the car is more likely to be accepted by the lessor when he is sure that by the remarketing of the returned car he will be able to recover the investment made for its purchase and the corresponding interest. Accordingly, the early return/termination fee should offset any potential losses to the lessor, his increased risk, as well as the extra administration costs that the lessor must incur.

This option is expensive to execute, the lessee loses all equity but at least exempts it from future lease payments and penalty interest and fees

  1. Early buyout of a leased car

Sometimes the lessee wants to terminate his future monthly payment commitments (for example in preparation for a long-term trip abroad), but would like to keep the leased car. The lease clauses may have a precise prescription for “a premature buyout of the leased asset”. This is most often the case with financial leasing contracts. Read them carefully and follow their guidelines.

Even when the lease contract does not have early buyout clauses, there is a good chance that the lessor will agree to such a step – just ask.

The cost of the early buyout of the leasing car should be equal to all remaining lease payments, less the relevant leasing interest. Completely in the order of things is the payment of an additional fee for the administration of early redemption. This fee may be equal to several future leasing interest payments (if these are transparent) or a specific fixed amount. It is important to remember that early buyout also carries with it the standard additional costs of completing the lease, such as transfer fees to the traffic police.

Although rare, it is possible that the lessor may not wish to allow the lessee to buyout the leased car in advance – after all, it is their job to invest their resources for a fixed period and a buyout will disturb their plans. This may be especially the case at the end of the lease term – for example, the last 12 months of the lease. It is also possible that the additional early buyout fees make the transaction financially meaningless for the lessee (this is only the way that the lessor subtly suggests that such actions are not favored).

  1. Trading in a used car for a new one

This scenario is only applicable if the desire to exit the lease from the lessee is dictated by a desire to renew the leased car – for example, with the new model. Often, some lessors (such as captive companies) even have special programs in that direction.

Under this option, the lessee returns his car to the lessor, terminates the lease payment under the old contract, and then receives a new car together with the liability to pay the lease payments for it, usually under a new leasing contract.

It is important to emphasize that the payment of lease payments will not stop here and it is very likely that their amount will increase (since the car is new and costs more). Accordingly, the costs, in this case, are likely to be the highest, although often the leasing companies successfully cover up their true size (especially if they are also the sellers of the new car).

  1. Leasing transfer (or leasing swap)

The lease transfer involves the transfer of the rights (for use and eventual acquisition of the vehicle) and liabilities (for payment of future lease payments, residual value, and additional costs) from one lessee to another.

This is probably the best and cheapest option for all parties for reaching an early exit from a leasing contract.

From the perspective of the lessor – only the lessee changes but the commitment for future lease payments remains. From the lessee’s point of view – he gets exactly what he wants, namely to get out of the lease, and in the lease transfer, he has the maximum opportunity to maintain his material interest. From the point of view of the new lessee – he has the opportunity to acquire a used car, often without a down payment and with a reduced lease term. The seller’s motivation can lead to extremely lucrative deals.

The main challenge in leasing transfers is finding a potential buyer of the lease and approving his creditworthiness by the lessor. The rest is a matter of negotiation between the two parties.

The cost of leasing transfer is relatively low. The leasing company typically collects a small administrative fee to analyze the new lessee and administer the transaction. The only other potential costs are related to finding a new lessee – potential fees on specialized internet platforms or those of leasing brokers.

  1. Ask the lessor

As you have seen from the above, the options for an early exit from a leasing contract are different. They also depend on the terms of the lease, the type of lease and the stage of execution of the leasing contract, ie. the options are numerous. At the same time, the motivation of the lessees can be quite different – from the desire to upgrade their leased car with the latest model to the complete inability to make the monthly payments. Accordingly, it would be difficult to capture the full diversity of options and their costs. Therefore, in the event of a need or desire for the early exit of the leasing contract, it is reasonable for the lessee to contact their lessor and explore the options together. If such a constructive dialogue is possible, it is entirely possible to reach a mutually beneficial solution. To carry out such consultation, lessees must exercise great care in the initial selection of a competent lessor who could respond to such changes during the leasing life cycle.

 

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