How does the lessor gain title to the asset (2 points)
By acquiring the asset from the supplier
Indirectly via the customer
How does the lessor purchase from the supplier through special circumstances
If the invoice has a retention the lessor should ensure the wording includes when the specific date title will be transferred
What does Nemo dat quod non habet mean and the rule?
No one gives what he doesn’t have - therefore denying the purchaser title if the other party doesn’t own it.
How does the lessor purchase the asset indirectly from the customer? (NARC)
Agent to purchase - lessee is yet to place the order, therefore an agent of the lessor acquiring the asset on its behalf
Novation of an order placed by a lessee, sometimes a lessee will place a purchase directly with the supplier with the intention of financing it
Refinance of the asset - sale and leaseback
Chattel mortgage - first priority fixed charge acts as security (England and Wales only)
What are the various terms included in typical documentation? (HAPPIER REP)
- Introduction = Naming of document and type of product
- Parties to the leasing document - Name and register
- Hiring of the asset - Basic description of letting./hiring the asset
- The equipment
- Acceptance conditions of the asset before agreement goes live
- Payment due on condition of the equipment throughout the agreement
- Rental and payment terms
- Right to end hiring of the asset with notice
- Events of default
- Payments on default of hiring the asset
What are the terms and conditions to protect the lessor? (PR BLOOD)
- Liability arising from the asset = Indemnity clause to protect the lessor in the event of 3rd party liability and lessor may note interest in insurance policy taken out by the lessee to protect itself from 3rd party claims
- Disclaimer of warranty = excluding lessor from liability for the condition of the asset. Holds up in court that lessors interest in the asset is purely financial.
- Part with possession clause = This prevents the lessee selling, using as security, subletting the equipment without prior approval. Exception is vehicles, where they can add sub-lease clause. Risk is dependent on underlying rental stream (possession addendum as lessor takes security over rental stream
- Change of ownership clause
- Maintenance obligation
- Insurance
- Representations and warranties = if wrong doing can be seen as an act of default
- Breach can trigger default (within the confines of Fair Treatment of Customers)
What are the forms of recourse against breach? (2 points)
If several they can issue reservation of rights, which acknowledges the breach but not waiving the right to act in the future.
New terms to convenant can be arranged
What are the termination scenarios?
Voluntary termination - lessee request early termination subject to notice period
Total loss - lessee pays termination sum and any shortfall is liability of lessee
Default and breach of contract
What is event of default?
Action (or circumstance) that causes a lessor to demand, or give notice of a demand for full repayment of its balance sooner rather than it was originally due
What are the additional sections for security?
- Guarantee - promise to pay by persons and failure results in liability for the guarantor to the level of what is owed
- Indemnity - more far reaching than guarantee (non-performance does not not affect the obligations) usually combined with guarantee
- Commercial guarantee (clear link and commercial benefit to the lending) and cross company guarantee (two or more related companies)
- Restricted guarantee (e.g. covers the shortfall from an asset valuation)
- Letter of comfort (not as strong as guarantee if defaults) - depends on stature and reputation of the party giving the letter rather than the terms itself.
How to prevent sub letting?
Usually a ‘part with possession clause’ to prevent the lessee from sub-letting
If already a plan to sub-let before hand the lessor puts in place documentation and sometimes a charge over the income stream
Scottish law do not have the laws for subletting rentals in regards to security yet
What is a landlord waiver?
It is making the landlord aware that their is an ability for the lessor to claim an interest in the asset - not including assets fixed to the fabric of the building (allows access to the building by the lessor)
What do lessors do if the asset is too big to move?
Insitu sale and/or reduce the recovery value on sale
What happens if the landlord refuses?
- Proceed without a waiver (represents future risk)
- Issue a form of prior notice - lessor writes to landlord confirming its ownership of the asset in possession of their tenant and obtains proof of delivery
- Issue an in life notice - last resort if landlord is trying to seize the asset
- Extreme cases landlord asks for rent from lessor in exchange for access
- Funder needs to balance the needs of the customer with the need to secure the asset
Types of property security?
Mortgage
Debenture - usually charge on company assets
Floating charge - Scottish law is the equivalent to debenture that is over assets
What to do if an asset could be deemed as under the charge?
Charge holders waiver
Cases for mandatory charge holder waiver? (3 points)
Sale and leaseback (as goods might fall under prior charge)
When hired by a 3rd party lessors will seek interest in end user income stream - could be competing rights to that income stream
If facility provided by the lessor is itself mortgage (chattel, marine, aviation)
How to protect lessor if the director is currently lending money to the lessee company?
Lessor can request legally binding agreement to not demand the loan or they must ask permission from the lender (sometimes more favourable than PG
