For both commercial trucking companies and truck owners leasing their vehicles and services, it is important to know the legal basics of lease agreements. The federal truth in leasing law (49 CFR Part 376) regulates truck leases. Knowing the ins and outs of these federal motor carrier regulations and checking the lease contracts for completeness and compliance with the regulations is critical to both the trucking company (the lessee) and the independent contractor/truck owner (the lessor).
Leasing Agreement Basics
The owner of the equipment is the lessor and the motor carrier is the lessee. It is important to keep these terms straight as the parties read the contract prior to signing. Both parties should also bear in mind that all of their agreements should be in writing; generally the contract will control any disputes between the parties, and any verbal agreements on the side that are not in the contract will likely be unenforceable. If possible, the independent contractor should obtain a copy of the contract in advance, examine it carefully and have an experienced attorney look it over. Commercial lessees should also have an attorney review their contracts for compliance with the law.
The contract should cover matters such as who pays for which permits, licenses and liability insurance. In general, the motor carrier lessee will need to have general liability insurance and freight liability on the loads. The independent contractor lessor may be required to provide additional coverage — for the vehicle as well as the tractor or trailer. The lessee should be sure to obtain proof that the lessor has obtained any required coverage. The lessee should also be prepared to provide the independent contractor with copies of applicable insurance policies that could affect the independent contractor's liability as well as any policies the independent contractor is paying for in whole or in part.
Potential Lease Problems
Many lease problems arise because the parties did not successfully clarify, or did not understand, the costs and payment structure in the lease. Most parties know enough at the outset to check for language as to actual payments for service: Will the lessor be paid by the hub mile, all dispatched miles, percentage of load, etc? Many types of payment structures are possible. Particularly in cases of percentage of gross pay, the lease should stipulate that the lessee will provide copies of freight bills and invoices to the lessor that clearly show what the lessee is being paid for the load. This will help both parties avoid disputes and possible litigation.
If the lessee is a common carrier, the lessor has a right to be provided with current rate schedules. Where a lessor is being paid a percentage of the total load gross, all charge-offs that may reduce that amount should be clearly specified in the contract. Both the lessee and lessor should be aware that the lessee is not allowed to charge the lessor for shortages and damages claimed on freight until the lessor has had a chance to see the claims and clarify any discrepancies.
]The parties should also specify whether the independent contractor or the carrier will pay for tolls, scale tickets, overweight fines, and equipment violations. These terms should be spelled out clearly in the contract. The law specifies that the lessor is to be paid for the completed haul within 15 days of turning in log pages and signed billing documents. The lessee cannot make the lessor wait for payment until the freight invoice is paid.
Other specific items that should be spelled out in the lease include: Who pays for fuel? If the lessor pays fuel costs, but buys from the lessee, will it be for actual cost or a markup cost? If the lessor has mechanical work done in the company shop, what will the rates for floor hours be? Will there be a parts markup? What about an accounting fee?
The contract should make clear that the lessee provides the lessor with an itemized service billing that includes all parts and labor, and that the lessor is legally entitled to purchase fuel, repairs and parts wherever he chooses to do so if he or she is the one paying for them. Including these terms in writing should help the parties to avoid unnecessary disputes down the road.
Many lessees require a repair escrow account for necessary repairs. The lessee should have a clear accounting system for the fund and be prepared to provide the lessor with the balance. The contract should specify exactly what is covered under the repair account; phrases like "but not limited to" may result in unnecessary ambiguity. The lessee should also provide regular expense statements and balance sheets to the lessor.
The lessee may also legally require a security escrow fund to be provided by the lessor and held by the lessee. Such escrow accounts must be kept separate from operating funds and accrue interest if not accessed. The contract should spell out the circumstances under which funds will be removed from the escrow account.
A complete accounting of additions and subtractions to the escrow fund must be provided to the lessor on a regular basis and escrow funds are required to be refunded to the lessor within 45 days of lease termination.
Final Thoughts: Protect Your Rights
The lease contract cannot be changed or supplemented without each party's consent and signature. Either party can sue privately for damages in the case of violations or breaches of the contract or leasing regulations, and the prevailing party may be able to recoup their attorneys' fees and costs from the losing party.
Whether you are a commercial trucking company lessee or an independent trucking contractor lessor, having an experienced attorney review the contract before you sign may help avoid legal action and increase your profits throughout the leasing period.
Article courtesy of Schneider & Onofry.