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What is leasing?
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contractual arrangement lessor provides the asset for use to lessee for an agreed period of time for a consideration in form of periodic payments
At the end of period the asset reverts back to the lessor unless there is a provision for renewal of the contract. The real function of lessor is not renting of an asset, but lending of funds.
Essential elements:
1. Parties: owner and user - lessor and lessee - lease-broker - lease financier 2. Asset: subject matter of a lease contract 3. Ownership separated from user 4. Term of lease: definite period 5. Lease rentals: compensate lessor for depreciation, interest, repairs, etc. 6. Options on termination: - lease is renewed - reverts to lessor - sells to third party - sells to lessee
Lease agreement:
Nature of lease Description of equipment Delivery and re-delivery Period Lease rentals Use Title Repairs and maintenance Alteration: no alteration without written consent
Prohibition of sub-leasing
Finance Lease Lessor transfers to lessee substantially all risks and rewards Lessor is only a financier, not interested in asset
- ownership is transferred to lessee by the end of lease term - lessee has an option to purchase the asset - lease term is for a major part of the useful life of asset - present value of lease payments > fair market value of asset If lessee cancels the lease, lessors losses are borne by lessee
Lessee selects the equipment Lessee negotiates price, delivery schedule, installation, Warranty, etc.
Primary Lease: when the full cost of an asset is amortized in one lease agreement. Secondary lease : when to amortize full cost of an asset more than one lease agreement is required.
Examples: mobile cranes, chartering of air crafts, Hiring of computers, taxi for a particular travel
Direct Lease:
Bipartite Lease: only two parties Tripartite Lease: equipment supplier, lessor and lessee
Leveraged Lease
- Lessor (equity investor), lender and lessee - Lessor buys asset through substantial borrowing - Trustee - Trustee remits debt service component to lender and balance to lessor
Domestic Lease
International Lease: lessor, lessee, equipment
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Contract Act:
(A) General provisions: 1. Contract 2. Legal obligation 3. Lawful considerations 4. Free Consent 5. Discharge of contract under following conditions: By performance By frustration By mutual agreement By operation of law
Contd.
(B) Special provisions: 1. Liabilities of lessee: Reasonable care no unauthorized use, to return good To insure and repair the goods 2. Liabilities of Lessor Delivery of goods Peaceful possession Fitness of goods To disclose the defects
Major players are: Independent leasing companies Manufacturer- lessor Financial institutions In-house lessor big companies Commercial banks
Advantages: to lessee
Financing of capital goods Additional source of finance Less costly Avoids conditionality Flexibility in structuring rentals Simplicity Obsolescence risk is averted
Advantages: to lessor
Contd.
Limitations Restrictions on use of equipment Loss of residual value Consequences of default Understatement of lessees asset Double sales tax: while purchasing and given for lease as well.