Financial Leasing Process and Obligations

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Mohammad Hamdan
Russian Federation

Financial Leasing Process and Obligations

First of all, instead of the term "financial leasing" you may also encounter: capital lease, sales lease or sale and leaseback. They all mean the same!

The financial leasing process is one of the best financing operations in the productive sectors although it is quite complicated (because of the relationships that bind between its parties). The process appears in several forms, but the most common form is reviewed by this contribution which shows the relationships of the financial leasing process and the most important obligations that you have to fulfill in case you are one of its parties.

Steps of a financial leasing process

  1. The investor decides upon some investment project for which it needs some necessary asset to be used as a component of production. It also determines which supplier/seller to get this asset from, and requests to get a buying offer (proposal).
  2. The investor turns to the finance leasing company and submits the seller's buying offer and her/his offer to lease the asset according to the financial leasing contract.
  3. The finance leasing company accepts the offers submitted, signs the finance leasing agreement with the investment project, and signs the purchase contract with the supplier/seller. It also signs with the investor an agency agreement to receive the asset from the supplier/seller on its behalf.
  4. The investor informs the supplier/seller about the signing of the sales contract by the financial leasing company, and requests for the delivery of the original. It receives the asset from the supplier/seller as an agent of the financial leasing company, and as a lessee.
  5. The investor informs the financial leasing company that it has received the asset, and begins paying the lease fees. Then the financial company pays the cash to the supplier/seller.
  6. The lessee continues to pay the fee to the financial company until the end of the contract. Then it has three options which are buying or returning the asset to the funded company or extending the contract to a new period.


Contracts involved in financial leasing

This process results in a set of economic relations that are regulated by three legal contracts:
  1. THE PURCHASE CONTRACT between the supplier/seller and the financial leasing company.
  2. THE FINANCIAL LEASING CONTRACT between the financial company and the investor.
  3. THE AGENCY CONTRACT between the financial company and the investor too.

Obligations of the financial leasing parties

As a party of this process, you have to bear certain legal obligations, which are:
  1. OBLIGATIONS OF THE SUPPLIER/SELLER:
    1. Transferring the ownership of the asset to the financial leasing company.
    2. Delivering the asset to the lessee of the financial leasing contract as an agent of the owner ready to be used. Including handing over all the manuals and instructions necessary for the asset's operation, and giving her/him a training course about how to operation it, if the nature of the asset necessitates this.
    3. Ensuring that the buyer's (financial company) benefit from the whole or part of the asset is not subject to legal or illegal obstruction, whether it is by the supplier's/seller's actions or the others' actions.
    4. Ensuring the conformity of the asset's specifications in the sale contract. It means that you guarantee the absence of assets defects, which were not apparent during the purchase, which affect its use according to its intended purpose.
  2. OBLIGATIONS OF THE INVESTOR (LESSEE) who is an agent of the financial company to receive the asset, and a lessee in the financial leasing contract:
    1. Executing the agency contract and receiving the asset from the supplier/seller.
    2. Paying the lease fees regularly and without delay.
    3. Preserving the asset. That means to use it personally, normally, according to the purpose intended for it, according to the instructions given by the supplier/seller, and to continually repair and maintain it. Here, you should consider that not using the asset means that you do not preserve it.
    4. Choosing at the end of the contract between paying the agreed price of the asset to buy it, returning it to the lessor or extending the contract for a new period.
  3. OBLIGATIONS OF THE FINANCIAL LEASING COMPANY (LESSOR) which is a principal in the agency contract, and a lessor in the financial leasing contract:
    1. Owning the asset and paying the price to the supplier/seller.
    2. Delivering the asset to the lessee by signing her/him the agency contract, so she/he can receive it directly from the supplier/seller.
    3. Ensuring that the lessee's benefit from the whole or part of the asset is not subject to legal or illegal obstruction during the financial leasing contract. For example: If a company filed a claim about having a right over the asset, you as a lessor must make every effort to ensure that the lessee's use of the asset is not affected by this procedure, otherwise you will have to compensate for that.
⇨ If you have any further information about the financial leasing process or about the parties' obligations, please share them here.

References:
United Nations Convention on Contracts for the International Sale of Goods (2010), United Nations, p. 54.
Guojin Liu, (2010), Finance Leasing In International Trade, The University of Birmingham, Thesis, p. 266.

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