In our previous article, we covered the basics of leasing as well as its financial importance for the business. In the present article we will look into the various forms in which the leasing contract appears. Also, the critical legal issues that may arise in the context of its conclusion and operation.
Forms of appearance of leasing
Within the framework of the principle of freedom of contract and since most of the provisions of the relevant law (:law 1665/1986) constitute soft law, the lease appears in transactions in several variations. In summary:
Simple leasing (lease)
The most important form of leasing is the simple leasing (: “leasing” in international transactions). The prospective lessee first approaches the supplier and negotiates (usually with them) the specifications of the thing and the price. They then goe to the leasing company, which buys or imports the thing in its name under the terms agreed by the lessee, pays the price and the supplier is instructed to deliver the thing to the lessee, with whom they have meanwhile concluded the leasing contract.
Mixed leasing (operating lease)
A key feature of mixed leasing is the fact that the leasing company undertakes the additional obligation (apart from granting the use of the object) to keep it suitable for the agreed use during the lease. That is, it undertakes the obligation of maintenance, repair, etc. This form is preferred in cases where the prospective lessee wishes to cover a short-term need of their business and the duration of the lease is generally short. The leasing company, assuming this obligation, must keep the thing in good condition. Its additional benefit is that it retains the ability to enter into corresponding, successive, contracts, making a profit from the repeated leasing of the same thing.
Reverse leasing (sale and lease back)
In reverse leasing, the lessor leasing company has previously purchased from the lessee the thing (movable or immovable) that will be the subject of the lease. In this way, the lessee succeeds in enhancing their liquidity from the received price without at the same time depriving them of the use of the thing. In practice, two contracts (sale and lease) are drawn up, but they are so closely related to each other that the drawing up of one constitutes a jurisprudential foundation (or condition) for the drawing up of the other. In the same context, the termination of one is a great reason for the termination of the other.
Subleasing
leasing company does not buy the object to be leased, but leases it from a third party and then sub-leases it to the (sub)lessee. This form serves the leasing companies, which do not assume the full cost or risk of acquiring the thing. This, in particular, happens in cases where the wage is a specialized item with rare demand.
Individual legal issues
Leasing is governed by Law 1665/1986, which does not, however, regulate the abnormal development of the contract. The fact that it essentially constitutes an unregulated contract has created legal concerns regarding its legal nature and the rules of law that must be applied. Undeniably, this is a mixed contract, in which there are mandatory elements of the lease of a thing and an agreement of preference and potentially includes elements of sale, order, etc. Despite the fact that there is a difference of opinion regarding whether the predominant element of the leasing contract is the lease or the credit, it is considered appropriate that each leasing contract be treated individually according to its individual elements.
Immediately below, an approach of the main legal issues that may arise in the context of a leasing contract, the more extensive analysis of which obviously is not within the limits of this article.
The lessor’s relationship with the supplier
The lessor is connected to the supplier of the thing to be leased by a contract of sale. However, it is a contract of sale which presents several peculiarities and it is validly argued that it is a genuine contract in favor of a third party (the lessee). In particular, the lessor usually entrusts the lessee with conducting the negotiations with the supplier, who must deliver the object of sale (lease) to the lessee. Of course, the question of responsibility arises here from the negotiations regarding whether, in case of damage to the supplier, the lessor or the lessee is responsible. And this, despite the fact that the liability of the lessor appears to arise from the fact that the lessee acts as an assistant to the lessor (CC 334). With the due delivery of the lease from the supplier to the lessee, the lessor fulfills their relative obligation towards the latter and acquires ownership of the lease themselves.
The assignment of the rights of the lessor from the sale to the lessee
It is usual in practice to conclude a term according to which the lessor does not have any liability towards the lessee for legal or factual defects or for lack of the agreed properties. As a “counterweight” for the exclusion of this liability, it is customary to agree on the assignment by the lessor to the lessee of their relevant claims against the supplier. It is an assignment of specific claims and not a transfer of the entire contractual obligation.
Both the exclusion of the lessor’s liability and the aforementioned assignment should be expressly agreed in the contract, so that an interpretation of the contract is not required to establish whether there is an exclusion of liability and an assignment of claims respectively.
The responsibility for the other cases of non-performance, i.e. non-delivery or late delivery, rests with the lessor, as it happens in common rental agreements. The conclusion of a relevant exculpatory clause with simultaneous assignment to the lessee of the corresponding claims is not guaranteed that it will be considered valid. However, even in this case (: judgment regarding its validity) we will not, as a rule, be led to the exemption of the lessor if the lessee fails to be satisfied by the supplier. The final ruling on the issue is a matter of wording and interpretation of the relevant exculpatory clause.
The assumption by the lessee of the risk of accidental damage or destruction of the object of the lease
A leasing contract according to which, unlike in common rental agreements, the lessee will bear the risk of accidental damage, destruction or theft of the leased item. This means that the lessee, in any of these cases, will still owe rent to the lessor. And not only that: they will have to compensate the latter in the event that, at the end of the contract, they are unable to return the use of the object.
The specific condition has the consequence of disturbing the balance of the rights and obligations of the contracting parties at the expense of the lessee (which is contrary to articles 2 § 6 of Law 2251/1994 and 288 CC). It could reasonably therefore be invalidated as abusive.
Such a potential nullity can be avoided by assigning the lessor’s claims to the lessee against the insurance company for insurance compensation (the lessee is legally obliged to keep the thing insured for all the above risks, but the policyholder is the lessor as owner of the object leased). Also, against the third party who damaged or destroyed the object.
The validity of the General Terms and Conditions (GTC) included in the leasing contract
Leasing companies should include in the contract pre-formulated conditions (General Terms and Conditions – GTC), which (usually) have not been the subject of prior individual negotiation with the prospective lessee. The validity of clauses in favor of the lessor regarding the exclusion or limitation of their liability included in the GTC are judged based on the relevant provisions of the Civil Code. In any case, while examining the validity of the GTC, one should check if there is a substantial disruption of the rights and obligations at the expense of the lessee (which conflicts with the provisions of articles 2 § 6 of Law 2251/1994 and 288 CC). It is worth noting, that in the event that the GTC provides for the lessee’s waiver of the right to terminate the contract for a great reason, this waiver should be considered invalid. And this is because the right to terminate for a great reason is based on the compulsory provisions of the Civil Code.
Leasing is, undeniably, a useful tool in the hands of businesses because of the financial and tax advantages it presents. However, the peculiarities of its legal nature – as well as the (complex) legal issues that arise in the context of its conclusion – require the special attention of companies that choose it to serve their operational needs. However, with the appropriate legal guidance, both during the conclusion and during the operation of the leasing contracts, businesses will enjoy the relevant benefits while protecting, at the same time, their interests in the best possible way.-
Evdokia Kornilaki
Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (July 30th, 2023).
Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.