Lease Agreements – What Do the Regulations Say About Them?
Owning and operating your own truck means you are more than a truck driver. You own a business, and how you operate your business can mean the difference between success and failure. One of your responsibilities as a businessperson is to ensure that any lease contracts entered into with authorized carriers are legal, sound, and fair.
There are regulatory requirements in 49 CFR Part 376 that all owner-operators should be aware of before entering into a lease agreement. Oral lease agreements are never a good idea. The lease must be in writing. Because the lease is a legal contract, binding both the owner-operator and the motor carrier to the terms in the agreement, be sure to read and understand the contract before signing. It is a good idea to seek legal advice to make sure the lease actually says what you think it says.
The contract basics
The lease agreement must identify the equipment to be leased and the parties involved. It must be signed by you as the equipment owner, and the authorized carrier/lessee.
The agreement must also designate when the lease begins and when the lease will end. The Federal Motor Carrier Safety Regulations require someone to be responsible for the safe operation of the vehicle at all times. While it is your truck and your business, the regulations say that when you are operating under a lease, it is the authorized carrier, or lessee, that has responsibility for the safe operation of the vehicle. The lessee/authorized carrier must furnish a written receipt recording the date and time it takes possession of the equipment from you. Upon termination of the lease, you must provide a "release of equipment" stating the date when the lease agreement ends and possession and control is transferred back to you.
The lease must specify the authorized carrier's (lessee's) obligation to maintain insurance coverage for the protection of the public and specify who has responsibility for other types of insurance, such as bobtail coverage. If you obtain insurance from or through the authorized carrier, the lease must state that you will be given a certificate of insurance containing the name of the insurer, the policy number, the effective dates of the policy, the amounts and types of coverage, the cost to you for each type of coverage, and the deductible amount for each type of coverage for which you may be liable.
Negotiable elements in a lease
Your written lease should clearly explain the method of compensation and rate of payment you will receive and describe terms under which loading and unloading will be performed.
Any chargebacks to you for cargo/property damage, expenses or insurance costs must be explained. If escrow funds are necessary, the amount of escrow required, the items the escrow will be applied to, and when and how the carrier will provide an accounting of escrow transactions should all be defined.
Operational costs must also be addressed. This includes items such as permit costs, base plates, licenses, fuel costs, fuel tax reporting, empty mileage, tolls, detention, accessorial services, and any unused value of licenses and permits. These operational costs may be negotiated and assigned to you, the lessor, or the motor carrier/lessee. Responsibility for maintaining and repairing the equipment should also be designated. Regardless of who bears responsibility for these items, the responsible party should be clearly shown in the lease agreement.
What is not negotiable in a lease
Some requirements of the lease contract are not open to negotiation. The lease must explain that purchasing services or equipment from the authorized carrier is not a condition of the lease agreement. The requirement of a 15-day settlement period is not negotiable. Nor is the owner-operator's right to a copy of the rated freight bill when compensation is based on a percentage of the revenue.
Remember, while the authorized carrier is responsible to the US DOT for the vehicle's safe operation, you are required to operate the vehicle lawfully and ensure compliance with all laws and regulations to the extent it is possible for you to do so.
Required documentation in and on the vehicle
The regulations require the signed lease agreement to be carried in your vehicle for the term of the lease. Your vehicle must display the legal name and US DOT number of the entity responsible for the safe operation of the vehicle. Under a lease agreement, this is the authorized carrier. When your lease is over, the carrier's name and US DOT number must be removed. The lease may provide that, upon termination of the lease, you must remove and return all identification to the lessee as a condition of payment.
We have looked at the high points of leasing contracts. Before entering into your own contract it will be time well spent to look carefully at the regulations, particularly Section 376.11 and Section 376.12. As a business owner, it is critically important to be prepared and know what you are signing. A complete and properly drafted contract should prevent any potential disputes between you and the carrier and contain the necessary provisions to allow you to profitably operate your truck.