Ligomarc ADVOCATES 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

Ligomarc ADVOCATES 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.

Ligomarc ADVOCATES 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

Ligomarc ADVOCATES 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.’

Ligomarc ADVOCATES 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.

Ligomarc ADVOCATES What is an asset? A leasable asset should normally have the following elements Value Ascertainable

Ligomarc ADVOCATES 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 3 rd Party Can obtain prior ranking Breach of Negative Pledge may not offer adequate remedy

Ligomarc ADVOCATES 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 3 rd Party Validity based on Registration

Ligomarc ADVOCATES 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

Ligomarc ADVOCATES 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.

Ligomarc ADVOCATES 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

Ligomarc ADVOCATES Master Lease agreement and Lease Schedule Agreements Master Lease Agreement General terms of the lease agreement Schedule 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.

Ligomarc ADVOCATES 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

Ligomarc ADVOCATES The Position of the Supplier supplierLessorLessee

Ligomarc ADVOCATES 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

Ligomarc ADVOCATES 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.

Ligomarc ADVOCATES 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

Ligomarc ADVOCATES 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

Ligomarc ADVOCATES 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.

Ligomarc ADVOCATES 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

Ligomarc ADVOCATES 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.

Ligomarc ADVOCATES 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

Ligomarc ADVOCATES 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

Ligomarc ADVOCATES 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

Ligomarc ADVOCATES 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

Ligomarc ADVOCATES 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.

Ligomarc ADVOCATES CONCLUSION END