Last Updated November 1, 2022
What is a Vehicle Leasing Agreement?
A Vehicle Leasing Agreement is used when possession of a vehicle is temporarily transferred from the owner (lessor) to someone (lessee) who pays to rent the vehicle for a predetermined period. The agreement should outline the following:
- The lessor’s and lessee’s personal information
- Details about the vehicle
- The lease’s duration
- Payments and leasing rates
- Insurance and warranty
You can use a Vehicle Leasing Agreement with any motor vehicle with a Vehicle Identification Number (VIN), including cars, trucks, motorcycles, motorized scooters and mopeds, recreational vehicles, and power boats with a Hull Identification Number (HIN).
A Vehicle Leasing Agreement is also known as:
- Car Lease Agreement
- Vehicle Lease Contract
- Motor Vehicle Lease Form
- Lease to Own Contract
Why should I use a Vehicle Leasing Agreement?
A Vehicle Leasing Agreement helps to protect the interests of the lessor and lessee. Having the terms of the agreement documented reduces the risk of misunderstandings or miscommunications between the two parties.
It's a good idea to use a Vehicle Leasing Agreement whenever a vehicle lease is being negotiated between two parties where a dealership lease form hasn't been provided.
What happens at the end of the vehicle lease term?
The lessee returns the vehicle to the lessor when the term is up, and the Vehicle Leasing Agreement expires. However, the lessee may also purchase the vehicle from the lessor if the contract provides that option. In this case, the lease payments made by the lessee during the duration of the agreement will typically be applied to the total purchase price.
A Vehicle Leasing Agreement also lists any penalties for ending the lease before the term is up. Early termination penalties can include paying the balance of the remaining lease payments, along with additional charges.
What are the lessee’s responsibilities?
The vehicle's lessee is responsible for providing proof of insurance and ensuring the vehicle remains in good condition. The lessor may bill the lessee for the necessary repairs if they return the vehicle with excessive interior wear, large dents or scratches, or any significant mechanical damage.
Who is responsible for registering a leased vehicle?
The vehicle's owner (the lessor) is responsible for registering the leased vehicle even though it will be in possession of the lessee.
How do I create a Vehicle Leasing Agreement?
You can easily create a Vehicle Leasing Agreement by completing LawDepot’s questionnaire. Using our template ensures you complete the following necessary steps.
Step 1: State whether the vehicle is for personal or business use
Start your Vehicle Leasing Agreement by stating whether the lessee needs the vehicle for personal use or business purposes.
If you're unsure whether the rental is for personal or business use, consider why the renter needs the vehicle. If they're using the vehicle as part of their occupation, it's for business use. If they're using the vehicle for everyday things that aren't related to their job, it's personal use.
Step 2: Provide your state
Provide your location and LawDepot will ensure your Vehicle Leasing Agreement is tailored to your state’s laws.
Step 3: Include the lessor’s and lessee’s details
Your agreement needs to include information about the vehicle’s owner and renter, such as:
- Full names
- Addresses
- Whether they’re an individual or organization
Step 4: Describe the vehicle
It’s essential that you provide descriptive details about the vehicle because you want to be clear about which vehicle is being leased. Some details you should provide are:
- Color (e.g., black)
- Make (e.g., Ford, Toyota)
- Model (e.g., Focus, Corolla)
- Year (e.g., 2022, 2023)
- Body type (e.g., SUV, pick-up truck)
- Vehicle Identification Number (VIN)
- Whether it’s new or used
All vehicles are assigned a unique 17-character VIN ("vehicle identification number" or chassis number) when they're manufactured. If you don't know your VIN, leave your answer blank for now and write it in after you have printed your document but before you have signed the document.
If your vehicle was manufactured in 1969 or later, your VIN is located on the driver's side dash, viewable through the windshield. You can also check the driver's side door, accident reports, insurance records, or repair work orders.
Step 5: State the lease details
Your Vehicle Leasing Agreement needs to state for how many months the renter is leasing the vehicle and if there is a limit on the number of miles per year they can drive it.
You need to include the lease rate, as well. The lease rate or annual percentage rate (APR) is the annual rate of interest charged by the lessor on the total lease payment. For example, 4.5%.
You can also include an option to purchase the vehicle in the agreement. This option allows the lessee to choose between buying the vehicle at any time during the lease or at the end of the lease. The purchase price will likely be the approximate residual value of the vehicle at the time of negotiations.
Please note that including an option to purchase may change the nature of the agreement from a lease to a conditional purchase contract which may affect its deductibility as a business expense.
Step 6: Provide the lease costs and fees
In order to calculate the total cost of the lease, the agreement needs to include the:
- Vehicle’s full retail value: The amount the vehicle would currently sell for, excluding any sales tax and fees.
- Vehicle’s residual value: The vehicle's value at the end of the lease term.
- Amount to be amortized over the lease term: The amount to be paid over the lease term
- Security deposit: A refundable deposit that is held as security in case there is damage to the vehicle or non-payment of the lease payment.
Also, describe any extra fees and whether there is a down payment included.
Step 7: Outline the monthly payments
Your agreement also needs to outline details about the monthly payments.
Determine the sale tax and whether there will be late fee charges. You also need to state when the first payment is due and if the lessee is allowed to make pre-authorized payments.
Step 8: State if early lease termination is an option
Decide if you'd like the lessee to be responsible for the difference between the residual value and the realized value if the lease is terminated early.
The residual value is the vehicle's estimated value at the end of the lease term. In this case, it's also known as a buy-out price. The realized value is the actual sale price the owner receives for the vehicle when a renter terminates the lease early, and the vehicle is sold.
The renter isn’t responsible for the difference between the residual value and the actual realized value if the lease is terminated at the end of the lease term.
Step 9: Outline any warranties
A couple of types of warranties can be applied to the lease: the manufacturer's warranty and a supplementary warranty.
The manufacturer's warranty is the warranty that comes with the original purchase of a vehicle. If there is still a warranty left on the vehicle, state how many years of coverage remain.
The supplementary warranty is when the owner or a third party provides a warranty for repairs that covers the period between when the manufacturer's warranty expires and the end of the lease term. State how much the supplementary warranty will cost the lessee if your agreement includes it.
Step 10: Outline insurance and deductibles
Your Vehicle Leasing Agreement needs to outline the:
- Minimum insurance coverage
- Maximum deductible on fire and theft insurance
- Maximum deductible on collision coverage
- Gap coverage (if applicable)
Gap coverage covers the difference between what the insurance company says the car is worth and what the lessee would have to pay under the lease if the vehicle is destroyed. This coverage stops the lessee from having to pay further charges.
Step 11: Include additional clauses (if necessary)
If any terms or unique issues haven't been addressed, include them in your agreement as additional clauses.
Step 12: Sign the agreement
Make your Vehicle Leasing Agreement legally binding by having the lessor and lessee sign the document.