Ligomarc ADVOCATES

PERTINENT LEGAL ISSUES IN LEASING

A presentation to the

Uganda Leasing Association

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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 may not offer adequate remedy

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Leases as Distinct from Credit Sales

Lease facility• Essence is Credit. Ability to

exclude Obligations

• Credit nature of allows a full-payout arrangement

• Concept of Bailment prevents third party interests.

• Registrable only as document

Credit Sale• Seller assumes obligations

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

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Leases as Distinct from Hire Purchase

Lease facility• No prospect of transfer

• Finance Lease is a full payout

• Obligations on Quality can be excluded

• Right to repossess based on ownership

• No licencing requirement

Hire purchase • Ownership may transfer

• Hiree can recover unpaid 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• General terms of the lease

agreementSchedule Agreements• The specific terms of the lease

• Rentals payable

• Capital cost

• Description of leased property

• Conditions precedent e.g. security provision cash guarantees, mortgage etc.

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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

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

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The Position of the Supplier

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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, lease schedule agreement

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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