PERTINENT LEGAL ISSUES IN
LEASING
A presentation
to the
Uganda Leasing Association
Ligomarc
ADVOCATES
Contents
1.0 Understanding the leasing facility
2.0 What is an Asset
3.0 Leases as Distinct from Other Forms of Equipment Financing
4.0 Parties to a Lease
5.0 Documentation of a Lease facility
6.0 Basic Rights and Obligations of Parties
7.0 Position of the Supplier
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Contents
8.0 Third Party claims
9.0 Challenges in Recovery
10.0 Insolvency
11.0 Standard Claims by Lessees in Leasing Litigation
12.0Court Relief in Leasing cases.
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Understanding the Lease Facility
1.1 Lease as defined by law: No Statute as yet in Uganda
1.2 Lease as a contract (components):
• Legal capacity to contract by parties
• Offer and acceptance
• Consideration
• Contractual intention
• Written terms of the contract
• Legality of the contract
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Understanding the Lease Facility
1.3 Lease as a Financial Facility
‘it is a contract where a party being the owner of an asset
provides the asset for use by a lessee for consideration that
maybe fixed or otherwise for a fixed period of time.’
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What is an asset?
• An assets means any property, including personal property,
that can be legally sold.
• The term includes immovable property, trade marks and
copyrights or royalties under intellectual property, software.
• The following may not be termed as leasable assets: shares,
investment securities, any financial instrument, government
bonds and securities.
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What is an asset?
A leasable asset should normally have the following elements
• Value
• Ascertainable
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Leases as Distinct from Secured Loans
Lease facility
• Ownership rights are
internationally recognised
• There is almost always an
opportunity to assert Legal
Right
• No prospect of third party
rights
Loans
• No extra-jurisdictional
recognition
• Chargee/ Lender’s rights
over asset not always
apparent
• 3rd Party Can obtain prior
ranking
• Breach of Negative Pledge
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may not offer adequate
remedy
Leases as Distinct from Credit Sales
Lease facility
Credit Sale
• Essence is Credit. Ability to • Seller assumes obligations
exclude Obligations
• Credit nature of allows a
full-payout arrangement
• Concept of Bailment
prevents third party
interests.
• Registrable only as
document
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on implied terms of quality/
Cannot be non-cancellable
– Seller to get damages for
breach
• Ability of Purchaser to
convey interest to 3rd Party
• Validity based on
Registration
Leases as Distinct from Hire Purchase
Lease facility
Hire purchase
• No prospect of transfer
• Ownership may transfer
• Finance Lease is a full
• Hiree can recover unpaid
payout
• Obligations on Quality can
be excluded
• Right to repossess based
on ownership
• No licencing requirement
future rentals only up to 2/3
capital cost
• Mandatory obligations on
fitness for purpose
• No repossession where 2/3
paid
• Hirer must be licenced
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Parties to the Lease
• The Lessor – owner of the assets, normally the financing
institution; banks or leasing houses.
• The Lessee – the party leasing the equipment
• The supplier, normally a manufacturer or agent.
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Documentation of a Lease Facility
• An application for the facility
• An offer letter
• A master lease agreement/ sale agreement
• A lease schedule agreement
• Proforma invoices, proof of purchase
• Supply agreement
• The Lease Ledger maintained by Lessor
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Master Lease agreement and Lease
Schedule Agreements
Master Lease
Agreement
Schedule
Agreements
• General terms of the lease • The specific terms of the
agreement
lease
• Rentals payable
• Capital cost
• Description of leased
property
• Conditions precedent e.g.
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security provision cash
guarantees, mortgage etc.
Basic Rights and Obligations of Parties
Lessor
•
•
•
•
Obligation to purchase and
deliver the leased equipment
To maintain a true and proper
account of the lease ledger
postings
Right to repossess and sell the
equipment in the event of
lessee’s breach of the lease
agreement
Right to claim for unpaid future
rentals
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Lessee
•
Right of quiet possession
•
Obligation to pay rentals as and
when they fall due
•
Obligation to maintain the leased
equipment in good condition
•
Obligation to insure the
equipment
•
Obligation to use the Equipment
in a skillful and proper manner
and by persons who are
competent to use the same
The Position of the Supplier
supplier
Lessee
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Lessor
Position of supplier
•
Both the Lessor and the Lessee have rights against the
supplier in the case of breach of merchantability/ fitness for
purpose implied/ express terms
•
Where general contract law does not give this right to the
Lessee, the Lessor normally assigns this right to the Lessee
under contract. Lessee can therefore, take advantage of any
warranty clause in the original sale agreement
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Third Party Claims
Creditors of the Lessee
The Lessee does not have any right to assign the asset
•
Judgment Creditors do not have any right to attach the
asset.
•
Anyone who acts in a way that impinges on the Lessor’s
rights will be regarded as a trespasser, and is liable to the
Lessor in damages.
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Third Party Claims
Creditors of the Lessor
•
creditors may take over the rights of a Lessor but will only derive the
interest only attributable to the lessor.
•
Creditors of the lessor cannot attach the asset under a court order because
attachment is based on possession.
•
they would also be obliged to honour the obligations of the lessor under the
lease agreement.
•
The Lessor has the ability to securitise the lease rentals as security to its
own creditors without the consent of the lessee.
•
Any rights assigned by the Lessor are subject to the existing lease
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Third Party Claims
Claims in tort
• Indemnity clause in lease documents
• Normally the asset is registered in the names of the lessor
• The asset is used by a bailee, a fact not known to the accident
victim
• Increased costs of litigation on the victim and the lessor
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Third Party Claims
Repairer's Lien
The repairer’s lien overrides the interest of the lessor only to
the extent of the sums owed on account of repairs to the
asset.
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Challenges in Insolvency
• Difficulty of disposal of specialised equipment results in
realisations below the projected market rates.
• Vandalisation of equipment
• Hiding of leased assets
• Litigation commenced by the lessee
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Legal Effect of Insolvency
• The insolvency of the lessee terminates the lease and the
lessor is entitled immediate repossession of its assets on that
occurrence.
• The insolvency of the lessor need not necessarily terminate
the lease
• The liquidator/receiver of the lessor is not entitled to repossess
the asset from a lessee unless the lessee defaults on the
lease.
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Insolvency …
• Proof of lessor’s claim
• Registries for motor vehicles, land, machinery - Ascertainable,
identifiable and distinguishable goods
• Registries for computers, cutlery etc - Unascertainable and
undistinguishable goods
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Standard claims by Lessees in a Court
action
• Allegations of excessive interest and punitive charges
• Supply of defective goods
• Sale of asset at an undervalue
• Premature repossession and enforcement
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Claims by Lessors in a Court action
Allegation
• Allegations of excessive
interest and punitive
charges
• Supply of defective goods
• Sale of security at an
undervalue
• Premature repossession
and enforcement
Point of reference
• Lease Ledger postings,
lease schedule agreement
• Proforma invoice,
correspondences on the
subject
• Valuation report, Study the
specifications of the
equipment and possibility
of realization of value.
• Lease ledger postings,
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lease schedule agreement
Court Relief
• Injunctions
• It is unfair to stay the lessor’s enforcement of his rights without
compelling the lessee to continue with his obligations.
• The lessor’s right to repossess and sell
• The legal ownership of the asset is vested in the lessor. He
should be allowed to reposes his asset if the lessee is in breach
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Court Relief
• The right to claim for future rentals
• Financing the purchase of equipment is an investment by a
lessor at the prompting of a lessee. The lessor should therefore
be allowed to recover his investment
• The lessors’ right to enforce a security in a charge or
debenture
• The right to enforce a charge is another of the options that
may be available to the lessor to realise his investment.
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CONCLUSION
• END
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