What is a Trucking Lease Termination Agreement?
A trucking lease termination agreement is a document that outlines the dissolution of a contract between a motor carrier or trucking company and an owner-operator or independent driver. A trucking lease termination agreement is entered into by the motor carrier and owner operator when they decide to terminate their business relationship with one another . These agreements can be used to conclude the relationship after the owner operator has filed bankruptcy or after a dispute has arisen between them. It is important for the parties to have a trucking lease termination agreement in order to make sure that their businesses are dissolved properly, and a court will look at these contracts when making decisions about damages and liabilities.
Key Components of a Trucking Lease Termination Agreement
Agreements to terminate a lease must contain certain key elements. First, the parties to the original lease agreement must be identified. Second, the parties to the termination agreement will need to agree on a final date for termination of the lease. Third, there should be a statement that the lessee has returned or relinquished possession of the trailer or truck pursuant to the termination agreement. Fourth, there should be a provision that includes any penalties, time deadlines, fees, or other compensation that either party owes to the other for early lease termination.
Some of the most common issues that arise involve how the truck lessor and lessee will calculate compensation under the lease. For example, some trucking company lessors may include a provision that requires the lessee to make weekly payments for the remaining weeks specified in the lease after the termination date. It is essential to the legal enforceability of these kinds of provisions that the termination agreement specifically stipulates a refund to the leasee of whatever portion of the weekly payment exceeds the damages caused by the breach of contract. A termination agreement may also require the return of repair costs or modifications made to the trailer or truck.
Common Grounds for the Termination of a Trucking Lease
Common reasons why parties terminate trucking leases can range widely depending on the relationships among the lessor, fleet owner, lessee, company driver/employees, owner/operator (owner/operator means a person who makes the decision, either individually or jointly with others, to lease or hire a vehicle), or independent contractor. The termination is usually because of advantages in logistics, better understanding of financials, change in corporate policies, change in relationships, or breach of contract by one of the parties and re-negotiation or modification of the lease.
The common reason for breaching the trucking lease is that it has become financially advantageous or is preferable to work with another company. A similar reason may be that the party alleges that the trucking lease was breached and is therefore terminating the trucking lease.
The obvious problem with termination of the trucking lease is the lawsuit, arbitration, or mediation may occur if a party is not properly notified and a disgruntled party may claim a breach of contract. The best option is to negotiate a termination of the trucking lease. The parties involved will employ the attorney that will assist in finalizing the termination. The typical provision in the termination of the trucking lease is the right, option, and/or waiver of the party to sue or claim anything against the other party in exchange for each having no liability for anything that may have incurred.
Termination: Legal Implications
Though the legalities involved in terminating a trucking lease and its associated trucking equipment obligation are fairly straightforward, you simply cannot afford to overlook even the simplest requirement. Failure to comply with any requirement can result in serious financial consequences for the carrier. First, the way you terminate the lease and cease to have liability to make payments to the Owner/Operator or other entity under the lease, must be in strict accordance with the requirements of the leasing act. In Texas, the statute requires lessors to provide a specific notice to the lessee that the lease terminates after 30 days, if within those 30 days, the lessee fails to do one of the following: (1) have an appropriate license to operate a commercial vehicle; (2) pass a required drug or alcohol test; or (3) comply with the lease requirements related to reporting of kilometers, releases from dispatch, compliance with any Department of Transportation regulations, or any other contractual duty specifically included in the lease. There are a number of other requirements for lease termination that are set out in the statute and that may be subject to addition through regulation. Therefore, it becomes critically important to ensure that the termination is done in strict compliance with the statute and any regulations or language in the given lease. If the lessor relies on a statutory right to terminate the lease for one of the various default/termination rights not directly related to the operation of the truck/trailer/vehicle, then the lessor should expect that the lessor may be sued, so legal counsel should be sought to govern the manner of the termination and to determine the likelihood of the company being able to recover necessary expenditures pursuant to the terminated lease obligations.
The Essentials of a Successful Lease Termination
On a practical level, both parties can take steps to ensure a smooth termination of a trucking lease. The biggest areas of difficulty are in documenting the termination and in understanding the effect on individuals assigned to the lease. Termination requires documentation in two forms: (1) in writing when a party wants to exercise a termination or cancellation clause; and (2) when a party chooses not to exercise an option which will result in a termination of the lease. Both pieces of documentation have practical approaches to them. If a management company or a leasing company wishes to exercise a right of termination or cancellation, the exercise should be in writing and should suggest an exit plan, even if that plan is no more than simply providing a timeframe for vacating the equipment. If one or two of the parties needs more time to vacate the vehicle, that reality should be reflected in the notice. In order to avoid a dispute between the parties after the termination, both parties should take time-stamped pictures of the vehicle to prove the condition of the vehicle upon surrender. If maintenance has not been done, document it. If there are items that need to be repaired, document the items. If all repairs are needed, document it . If any items are missing, have documentation of the missing items. When a party does not exercise an option or fails to give notice of an intent to not exercise an option that results in a termination, the same approach should be taken. The party which elects to not exercise an option should provide some guidance to the other party. That guidance could include a timeframe for vacating the vehicle and a timeframe for all payments. That is important because if a driver is set up with direct deposit for pay, they may not know of a cancellation until they check their bank account and find no deposit. A poorly drafted system can damage driver relations even when it is not the intent of management. The second area which presents a problem has to do with the way in which a termination affects those who have been assigned to the vehicle. The first step is to have good assignment language in the lease which permits the assignee to continue to be paid. If the assignment language does not permit it, then the assignment must be canceled prior to the termination or the assignment will be caught in contract limbo. When the assignment is properly documented, the termination of a lease can occur without any interruption to an assignee’s pay.
The Fallout of an Improper Termination
Improperly terminating a trucking lease or operating agreement can result in significant financial exposure for the motor carrier. Based on the facts and circumstances, exposure can take the form of damages, reformation of the contract to reflect the true intention of the parties, or injunctive relief preventing the lessor from pursuing its remedies under the lease agreement.
In any dispute over the termination of a trucking lease or operating agreement based on an improper or illegal termination, the lessor will almost certainly argue that an improper termination cannot be enforced against it on public policy grounds or as a statutory violation. This is contrary to the general rule that the court should not adjudicate disputed claims arising under bilateral contracts to which it is not a party. See, e.g., Concord Boat Corp v Brunswick Corp, 248 F.3d 759, 767 (8th Cir 2001); Clarke v State Farm Mutual Automobile Ins Co, 503 F.3d 693 (7th Cir 2007); and West American Insurance Co v McCoy, 106 Idaho 877, 884 (1984).
Similarly, the lessor will argue that the termination was invalid unless it complied with the terms of the lease or statute. That the lessor may not be harmed does not obviate the requirement that the lease be properly terminated. See, e.g., Pulsafeeder, Inc v General Motors Corp, 826 F. Supp 161, 167 (ED Pa 1993).
Finally, the lessor will almost certainly argue that an improper termination is unenforceable and cannot form the basis for a breach of contract counterclaim, because "there can be no injury or harm to either plaintiff or defendant as a matter of law" where there is no statutory violation. See, e.g., Concord Boat Corp, 248 F.3d at 767; see also Clarke, 503 F.3d at 697.
In seeking to avoid the enforcement of an improper termination, the lessor will likely argue that it would effectively rewrite the lease or agreement to be in compliance with the applicable statute or regulation. This is not appropriate. To the extent possible, courts should interpret a contract as written. ULTEQ, Inc v Elwyn, Inc, 613 F. Supp 2d 481, 500 (ED Pa 2009).
The exception to this rule is where the lease or agreement is found to be against the public policy of the state. In such cases, the court should determine the proper course and require the parties to do what the statute contemplated. Rogers v Urban Hospitality Group, Inc, 2008 U.S. Dist. LEXIS 104825, at *18 (MD Ala Dec 22, 2008) (citing Anderson v Equitable Life Ins Co of the US, 186 F.2d 111, 113 (5th Cir 1951)).
Best Practices for Negotiating Trucking Lease Termination Terms
In negotiating the termination terms of a trucking lease, there are several strategies that can be employed to arrive at a beneficial outcome. Ultimately, a good solution will be balanced between the landlord, who is looking to secure his own assets, and the contractor, whose interest lies in finding a new opportunity without spending more money than he has to.
• Effective communication is the key to any strong negotiation. Let the contracting agent know what you want, within reason, and why your position makes sense. Share details about how the lease is no longer working for you. If a termination payment is required, share specifics about what it will be used for. Try to develop a strong, collaborative relationship with the leasing company; if they feel that they are well covered against loss or damages, they may be more likely to negotiate with you.
• Avoid entering into negotiations with a confrontational attitude. Even if you are angry about the permissions and restrictions contained in the lease agreement , it is critical that you respect the position of the landlord and look for ways to both sides’ benefit; a good opening offer can get a negotiation off on the right foot. Exchanging sample contracts from other vendors to evaluate what is standard for the industry can help you find a compromise that works for those involved.
• Think long-term, not short-term. While it is natural to want to part ways with an unhappy leasing company as soon as possible, this kind of strategy does not play out well in the long run. Many people you encounter in your career will have a less than favorable opinion about a company that is not fair to their former employees, especially if they have committed to treating you right.
• Be honest and reasonable. Do not withhold legitimate information, place excessive requirements or make demands that are outside the norm. While you may feel that the leasing company has treated you unfairly, try not to seek revenge through the termination of the lease; instead, be just as honest and fair as you have wanted them to be with you during the term of the lease.