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Good Faith Deposit Red Flags

with Impact Executive Team Lead, Nick Callaghan

A good faith deposit, often referred to as an "earnest money deposit" or simply a "security deposit," in an equipment finance lease agreement is a sum of money that the lessee (the party leasing the equipment) provides to the lessor (the equipment owner or financing company) as a sign of commitment and to secure the lease transaction.

It serves several purposes:

  1. Commitment: The deposit shows the lessor that the lessee is serious about entering into the lease agreement. It signifies the lessee's commitment to moving forward with the transaction.

  2. Security: It provides the lessor with a measure of financial security in case the lessee defaults on their lease obligations, such as making lease payments or returning the equipment in good condition at the end of the lease.

  3. Damages or Costs: In the event the lessee breaches the lease terms or returns the equipment in a damaged condition, the lessor can use the deposit to cover costs, repairs, or any outstanding payments.

  4. Assurance of Intent: The deposit helps prevent frivolous or insincere lease inquiries, as the lessee has some financial stake in the transaction.

The specific amount and terms of the good faith deposit can vary widely depending on the equipment, the lessor's policies, and the negotiation between the parties. It may be a fixed amount or a percentage of the total lease value. The deposit is typically held in an escrow account or a separate account, and the lease agreement should outline under what circumstances the deposit can be retained by the lessor or returned to the lessee.

While we would like to think that most companies operate ethically and adhere to the terms of good faith deposits in lease agreements, the reality is that instances often take place where some companies or individuals have exploited these deposits. Exploitation can take various forms, and it's essential to be aware of potential red flags.

Here are some ways in which companies might exploit a good faith deposit:

  1. Non-Refundable Deposits: Some unscrupulous lessors may label the good faith deposit as non-refundable, regardless of the circumstances. This is often unfair to lessees, as they should typically expect a refund if the lessor fails to fulfill their obligations or if the lease falls through for reasons beyond the lessee's control.

  2. Ambiguous Terms: A lease agreement with vague or unclear terms regarding the use and refund of the deposit can be exploited. Lessors may take advantage of the lack of clarity to retain the deposit for reasons that were not explicitly outlined in the agreement.

  3. Hidden Fees: Lessors might impose excessive fees or charges for minor issues with the equipment or the lease, depleting the deposit quickly and leaving the lessee with little recourse.

  4. Lease Cancellation: Some lessors may structure their agreements in a way that makes it difficult for lessees to cancel the lease, making the deposit effectively non-recoverable.

  5. Unjustified Deductions: Lessors may unjustifiably deduct portions of the deposit for alleged damages or maintenance expenses, even when the equipment is returned in good condition or the maintenance costs were included in the lease agreement.

  6. Delayed Refunds: Some companies might delay the return of the deposit, citing various reasons, which can be particularly problematic for lessees who need their funds promptly.

To protect yourself from potential exploitation of a good faith deposit:

  1. Carefully Review the Lease Agreement: Ensure that the lease agreement clearly outlines the terms and conditions related to the deposit, including under what circumstances it can be retained or refunded.

  2. Seek Legal Advice: Consult with a legal professional or advisor to review the lease agreement before signing it. They can help you identify any unfavorable terms or potential pitfalls.

  3. Research the Lessor: Do some due diligence on the lessor to check for their reputation, customer reviews, and any history of disputes related to deposits.

  4. Maintain Documentation: Keep thorough records of the equipment's condition, any maintenance or repair activities, and communications with the lessor throughout the lease term.

  5. Document the Equipment Return: Take pictures or videos of the equipment when returning it to provide evidence of its condition.

  6. Know Your Rights: Familiarize yourself with your legal rights and obligations as a lessee in your jurisdiction, which can vary from place to place.

If you suspect that a company is exploiting your good faith deposit or acting unfairly, consider seeking legal advice and potentially pursuing legal action to protect your rights and recover your deposit. Already have a lease contract? Use our lease cost analyzer at no cost for an agreement analysis to review and potentially reveal overcharges, unjust fees, impossible conditions, onerous clauses, and automatic extensions. Save money on your next equipment lease or financing with CoreTech! Contact today to get started!


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