What is an Operating Lease Agreement?
Operating Lease (OL) agreement is very similar to a Contract Hire agreement, in that it is a fixed term and mileage-based agreement for the hire of a car or van for a period usually between 2 and 5 years. However, with OL only the first 12 months road fund licence is included, and the vehicle is usually registered to you and not to the finance company, but the vehicle will not belong to you at any point in the agreement and so you cannot sell it. As with a Contract Hire agreement, it’s important that your agreement reflects your predicted annual mileage and you will pay an initial rental followed by an agreed number of fixed monthly rentals and and all rentals are subject to VAT at the prevailing rate for the specific period of hire you have chosen. At the end of the agreement the vehicle must be returned to the finance company.
An Operating Lease agreement may not be suitable for you in certain circumstances. For example:
If you wish to own or buy the vehicle
If you might need to change your vehicle early (early settlement will incur charges)
If you would like to shorten your period of hire by pre-paying
If you do not know what your predicted mileage will be
Business type restrictions, e.g. vehicles to be used as Taxis or for Driving Schools
If you plan to export the vehicle or use abroad for extended periods
If you do not wish to pay for the Road Fund Licence in the second year
If you do not want the vehicle to be registered to you
Benefits of an Operating Lease agreement:
Low initial outlay and fixed monthly rentals
Choice of period of hire from 2 years and a total mileage up to 120,000 miles, maximum 40,000 per annum
The vehicle is simply returned at the end of agreement, removing concerns about disposal values and depreciation
VAT on the rental is reclaimable If you are vat registered – 100% on LCVs, 100% on the maintenance element for cars and LCVs, 50% on the finance element for cars (or 100% for cars solely used for business eg pool car)
Tax efficient – up to 100% of the rental cost can be offset against taxable profits
Taking care of the vehicle:
You must ensure the vehicle is always comprehensively insured.
You must pay any additional charges that you incur for example a parking fine or congestion charge on time. If you don’t, the cost and/or fine may be issued to the finance company who will invoice this to you together with an administration charge that they will levy.
You must have the vehicle serviced and maintained by a main franchised dealer in accordance with the manufacturer’s recommendations and keep it roadworthy. If you do not service and maintain the vehicle, the funder will make a charge when the vehicle is returned as this will affect its value. You may add a cost-effective maintenance package which will cover routine servicing, maintenance costs and tyres, subject to fair wear and tear plus breakdown assistance to enable easy budgeting and give you fixed cost motoring. If you include a maintenance package please note the funder may decline to settle any charges if the total mileage on the agreement is exceeded.
At the end of the agreement the finance company will assess the vehicle condition based on the standards set down in the British Vehicle Rental and Leasing Association’s fair wear and tear guide. Refurbishment charges may apply if the condition is not satisfactory.
If you exceed the total contract mileage you will be charged at the pence per mile as detailed in your agreement for the over mileage.
When the vehicle is returned, it must have all items that were present when it was delivered for example, all keys, the locking wheelnuts. If any items are missing, you will be charged for the replacement.
Failure to make payments in full and on time may result in the contract being terminated and the vehicle repossesed. Only enter in to an agreement if you are comfortable with the financial commitment and terms.