A railcar lease agreement is usually two documents: a master lease that sets the rules for every car you will ever take from that lessor, and a rider or schedule for each group of cars that sets the car type, count, rent and term. Most shippers negotiate the rider and sign the master lease as boilerplate. The money is in the boilerplate. Below are the clauses that move it, quoted from real railcar leases filed with the SEC, and what to ask for in each.
How a Railcar Lease Agreement Is Built
Every lessor's paper looks a little different, but the structure is almost always the same. The master lease holds the general terms: maintenance, mileage, insurance, taxes, default, return. Each rider (some lessors call it a schedule) lists the specific cars by reporting mark and number and sets the rent, term, permitted commodity and any special terms for those cars.
The order of priority matters. The CIT master railcar lease with Kansas City Power & Light says the terms of any schedule "shall control, as to Cars on such Schedule, over any inconsistent terms elsewhere." So a concession you win in the master lease can be quietly undone by a rider, and a bad master-lease clause can be fixed in one. Read them together, and keep every rider. Leases also get recorded with the Surface Transportation Board: the same CIT lease requires the lessee to sign a memorandum for filing with the STB under 49 U.S.C. 11301, which is why lease filings are public at all.
Before the clauses, settle the structure question that drives most of them: full-service or net. In a full-service lease the lessor maintains the cars, tracks inspections and usually pays property tax. In a net lease you do. Many of the clauses below change meaning depending on which one you signed.
Delivery and Acceptance
Rent starts when you accept a car, and acceptance can happen without you deciding anything. In the Bunge North America railcar lease with Southwest Iowa Renewable Energy (325 tank cars and 300 grain hoppers), the lessee had three business days after delivery to reject a car in writing. Failing to inspect in that window, or simply loading the car, counted as acceptance. Acceptance then "shall presumptively establish" that the car met the lease standard.
What to ask for: a rejection window long enough for your people to actually inspect, a written delivery standard (clean, empty, free of residue, in interchange condition), and rent that starts on acceptance rather than on shipment from the lessor's shop. Photograph every car on arrival. Those photos are the baseline for every return charge you will dispute years later.
Rent, Late Charges and Rent Abatement
Rent is normally monthly, per car, in advance, with the first month prorated. The Bunge lease prorates on a 365-day year from the day of acceptance. The CIT lease charges interest of 1.5% per month on anything more than ten days late and says rent is paid "without counterclaim, deduction, reduction or setoff," with one exception: maintenance amounts in good-faith dispute do not have to be paid until the dispute is resolved.
The clause worth more money than the late fee is rent abatement: when does rent stop while a car is in the shop? The two filed leases answer it very differently.
- CIT: rent credit only after the car has been in the shop more than five days, and only if you notified the lessor before routing it. No credit at all for shop time on lessee maintenance items.
- Bunge: rent stops on the day the car arrives at the shop (or the day you report the defect, if it arrived without notice) and resumes when it leaves. Rent also stops on the date of a derailment. It keeps running if the repair was caused by your misuse, or if the car was damaged on a private siding.
On a fleet with a few cars in the shop every month, that difference is real money. Ask for rent to stop on shop arrival for any repair that is the lessor's responsibility.
Maintenance: Who Fixes What
Even a full-service lease carves out items for the lessee. Read the carve-outs, because that is where the invoices come from.
- Lessee maintenance items. The CIT lease puts on the lessee any specialty items named in the schedule, damage while the car is in the custody of the lessee or its shipper or consignee, and damage or corrosion from unpermitted use.
- Car-type carve-outs. The Bunge lease makes the lessee responsible, on tank cars, for "all movable parts, including angle valves and check valves" and, where fitted, thermometer wells, gauging devices, regulator valves, safety heads and top unloading valves. On hoppers, the lessee inspects and cleans outlets, hatches and dome covers and pays for damage to them. It also has to replace lost or broken removable parts such as dome covers, hatch covers and outlet caps.
- Who may repair. Both leases bar the lessee from repairing cars without the lessor's written consent, except running repairs made under the AAR Interchange Rules. The CIT lease caps payment for running repairs at the AAR price basis.
What to ask for: a written list of lessee maintenance items for your car type, matched to how your plant actually loads and unloads. If your unloading crew opens outlets with a bar, the outlet clause is your clause. When the repair bills come, check them against the lease before paying. Our guide to auditing railcar repair invoices walks through it.
Mileage, Empty Miles and Railroad Charges
Railroads pay mileage allowances on some private cars, and the lease decides who keeps them. In both filed leases the lessor collects the mileage and passes it to the lessee: the CIT lease remits it as received, the Bunge lease credits it against rent. Both also require the lessee to refund mileage the railroads later reclaim. Our explainer on railcar mileage allowance covers how the payments work.
The flip side is empty mileage. Where a railroad's tariff charges for empty miles in excess of loaded miles, both leases pass 100% of that charge to the lessee, and both treat the railroad's mileage reports as prima facie evidence. Both also put demurrage, track storage and detention on the lessee. The Bunge lease adds switching and special handling, but excludes charges on a car moving to a shop for lessor-responsibility repairs. Ask for that exclusion if your lease does not have it. And price idle time properly: our guide to railcar storage costs has the numbers.
Use Restrictions and Subleasing
The use clause is short and it can kill a plan. The CIT lease bars the lessee from:
- loading any hazardous material;
- putting cars in unit-train or other high-mileage service unless the schedule allows it;
- using cars outside the United States beyond temporary or incidental use;
- modifying the cars or placing its own lettering on them without consent.
The Bunge lease allows the US, Canada and Mexico, but never more than 50% of the fleet in Mexico at any time.
Then there is subleasing. The CIT lease says, in capitals, that the lessee may not "sublease or assign any Cars to any party" without the lessor's prior written consent, and any sublease in violation "shall be void." The Bunge lease is the same and adds that a permitted sublease does not release the original lessee from anything. If there is any chance volume drops during the term, negotiate sublease consent now, "not to be unreasonably withheld," while you still have leverage. It is the clause that lets you turn idle cars into an offset later. Our railcar sublease guide covers how that works in practice, and the sublease board is where idle cars get placed.
Casualty, Insurance and Taxes
Casualty. When a car is destroyed, rent stops. Who pays for the car depends on where it was. Under the Bunge lease, if the loss came from the lessee's misuse, a non-subscribing railroad, or a private siding or industrial track, the lessee pays the car's depreciated value under AAR Interchange Rule 107, in cash, within 15 days of the lessor's request. On the general railroad network, the handling railroad is normally responsible under the Interchange Rules. Your own plant track is the exposure.
Insurance. The CIT lease requires commercial general liability of at least $10,000,000 per occurrence, names the lessor as additional insured, and lets the lessor buy coverage at the lessee's expense or declare a default if coverage lapses. Send the requirement to your broker before signing, not after.
Taxes. In the CIT lease the lessor pays property taxes on the cars and the lessee pays sales and use taxes. In net leases property tax often moves to the lessee. See our guide to railcar property tax for how it is assessed.
Mandated Modifications
When a regulator or the AAR requires a change to the cars, someone pays for it. The CIT lease answers in one line: the lessee pays an extra $2.00 per car per month for every $100 the lessor spends on a required modification, starting when the car leaves the shop, with no rent credit if it is back in service within 15 days. On a car that needs a $10,000 retrofit, that is $200 a month added to the rent for the rest of the term.
For tank car lessees this is not hypothetical. Federal rules are phasing older tank cars out of flammable liquid service, and lessors have been retrofitting or replacing cars to keep them in service. Any tank car lease signed today should say who pays for a mandated retrofit, how the cost is recovered, and whether you can return the car instead. Our tank car leasing guide covers what to check on the car itself.
Term End, Holdover and Return
This is the clause from the key fact above, and it is the most expensive one to misread. Under the CIT lease, the term runs until the later of the expiration date or the date every car is returned and accepted. Rent continues until then. Thirty days past expiration, with ten days' written notice, the lessor can charge 150% of the previous rent.
The return standard is just as specific. Each car must come back:
- in interchange condition and free of AAR Rule 95 damage;
- empty and free of commodity residue;
- suitable for the commodities allowed in its schedule;
- with the lessee's logos removed.
The lessor can inspect for up to 15 days after return. The lessee gets notice and can attend. Then comes the trap: unless the lessee objects within seven days of the inspection, it is "deemed to be in agreement" with the results, and the invoice is due in 30 days. A seven-day window is easy to miss if nobody owns the return.
Our full guide to railcar lease return conditions covers what lessors bill at return and which charges you can dispute. Before you renew instead of returning, check the offer against the market with the lease renewal benchmark and the current railcar lease rates.
Default and Assignment
Default clauses are one-sided in every lease, and you will rarely move them much. You should still know what they say. The CIT lease gives the lessee 30 days to cure after notice. After that, or immediately on a bankruptcy filing, the lessor can terminate, repossess the cars and recover the present value of all remaining rent for the term, discounted at 6% a year, plus costs and attorneys' fees. The lessee also owes any shortfall if the lessor re-leases the cars for less.
Assignment runs one way too. The lessor can sell, pledge or transfer the lease and the cars without your consent, and your rights become subordinate to its lenders. That is normal: lessors finance their fleets. It is also why the name on your invoice can change mid-term. Lessor consolidation means the counterparty you signed with may not be the one you return the cars to. Our list of railcar leasing companies tracks who now owns which fleet.
A Pre-Signing Checklist
- Read the master lease and the rider together. Mark every place the rider overrides the master.
- Fix the acceptance window. Get enough business days to inspect, a written delivery standard, and rent from acceptance.
- Get rent abatement from shop arrival for lessor-responsibility repairs, with no waiting period.
- List the lessee maintenance items for your car type and match them to how your plant handles the cars.
- Exclude shop moves from railroad charges and confirm who keeps mileage allowances.
- Check the use clause against your commodity, service pattern (unit train or not) and any cross-border moves.
- Win sublease consent now, not to be unreasonably withheld.
- Send the insurance requirement to your broker before signing.
- Settle who pays for mandated modifications, especially on tank cars.
- Calendar the return: notice date, return point, inspection window, objection deadline and holdover start.
If you are weighing whether to lease at all, run the numbers in the lease vs. buy calculator and read the true cost of leasing a railcar first.
Sources: Master Railcar Lease between The CIT Group/Equipment Financing, Inc. and Kansas City Power and Light Company, dated May 2, 2001 (Secs. 1–4, 6–11, 14), Exhibit c-45 to Great Plains Energy filing, May 21, 2002, sec.gov; Amended and Restated Railcar Lease Agreement between Bunge North America, Inc. and Southwest Iowa Renewable Energy, LLC, dated March 25, 2009 (Secs. 3–12), Exhibit 10.1 to SIRE Form 10-Q, August 14, 2009, sec.gov. Quoted terms are from those specific agreements and are shown to illustrate common clauses; your lessor's terms will differ. This is general information, not legal advice. Your lease and riders control.
Frequently Asked Questions
What is a railcar lease agreement?
A railcar lease agreement is the contract under which a lessor supplies railcars to a shipper for a monthly rent. It is usually a master lease that sets the general terms (maintenance, mileage, insurance, taxes, default and return) plus a rider or schedule for each group of cars that sets the car type, count, rent, term and permitted commodity.
Does the rider or the master lease control?
Usually the rider. Filed railcar leases commonly say that the terms of a schedule or rider control over inconsistent terms in the master lease for the cars on that schedule, so a concession in one can be changed by the other. Read them together.
When does rent start on a leased railcar?
Rent usually starts on acceptance. In one filed lease, the lessee had three business days after delivery to reject a car in writing, and failing to inspect in that window or loading the car counted as acceptance. Rent for the first month is normally prorated by day.
Can I sublease railcars I have under lease?
Only with the lessor's consent in most leases. Filed railcar leases bar subleasing or assignment without prior written consent, make an unauthorized sublease void, and keep the original lessee liable even when a sublease is approved. Negotiate consent not to be unreasonably withheld before signing.
What happens if I keep railcars past the end of the lease?
Rent continues until the cars are returned and accepted, and many leases add a holdover premium. One filed master lease lets the lessor charge 150% of the previous rent once cars are more than 30 days past expiration, after ten days' written notice.