Crude by Rail and Negotiating Tank Car Leases: Best Practices

November 05, 2018

Written By Simon Foxcroft

Canadian crude oil exports by rail keep reaching all-time highs. Over 229,500 bbl per day were transported in August 2018, according to the National Energy Board. This was the fifth month in a row a new record has been set and a 91% increase from 12 months before. In March 2018, the International Energy Agency said crude by rail shipments in Canada are expected to grow to 390,000 barrels a day in 2019.

Source: National Energy Board

 
This surge is creating a strong demand for tank car leasing in Canada—and companies need to understand the complexity of this area. Leases are typically filled with industry terms, they are often negotiated in tight commercial time constraints, and the ability to negotiate effectively can be constrained by the availability of a finite number of suitable cars.

Here are some best practices for companies to consider when settling terms of a tank car lease.

Importance of careful negotiation—Standard forms of leases tend to be one-sided in favour of the lessor, and are frequently drafted in anticipation of dominant use in the United States. Companies need to pay close attention to the terms to mitigate risk (liability/financial) and ensure the lease arrangement meets their commercial and operational needs. The terms of the lease will also be critically important in the event of any subsequent disputes.

Acceptance provisions and practices—Key issues include:

• being clear on the consequence of acceptance of delivered cars under the terms of a lease;
• narrowing the implications of acceptance;
• being wary of “acceptance certificates” containing prejudicial terms; and
• having comprehensive and reliable pre-acceptance inspection practices.

Return provisions and practices—Companies need to ask:

• Is the return location and return condition reasonable?
• Is there an obligation on the lessor to inspect and accept returned cars within a reasonable period of time?
• Will the condition of the car run afoul of any corrosion clauses?
• Is the return condition being clearly documented to rebut later allegations of damaged or unclean cars?

Governing law—The governing law and attornment provision of a lease impacts how the clauses of the contract will be legally interpreted. It also determines where a dispute will be litigated. Companies need to consider what law should govern, having regard to:

• who the counter parties are;
• where their head offices are located; and
• where the cars will dominantly be used.

Maintenance and upkeep—Leases need to be clear on:

• who is responsible for what;
• what are the specific “lessee maintenance items”;
• whether it is a full-service lease; and
• rent abatement during lessor repair processes.

Modifications—The law regarding tank car design and safety requirements is rapidly changing and somewhat unpredictable. Leases need to be clear on:

• who is financially responsible for any required upgrades to meet legislative standards;
• termination and substitution rights for obsolete cars; and
• who has responsibility for ensuring that new build cars will be compliant for long-term use in Canada and the United States.

Other areas for companies to consider include tax and tariff provisions (Canada/United States), the scope of intended use, warranties and specifications, and rights to sublease and trip lease.

Lessees need to pay very careful attention to the negotiation of rail car leases—terms that are settled without due consideration can come back to haunt them later.

Authors