Forms and legal classification of leasing contracts I

by Johannes Fiala, lawyer
0. Introduction Both real estate and movable assets (movables) can be considered as objects for financing via leasing. In the management of real estate there is always the acquisition of equipment, machinery, vehicles, where the question of financing arises. This article gives an overview in its three parts and thus helps the house owner and manager to subject possible offers in all areas to a critical appraisal.
1. forms of structuring The civil law classification of leasing is partly inconsistent; sometimes there is talk of rent, agency, loan, sometimes of hire purchase, legal purchase, atypical contract: A legal classification of leasing contracts should therefore sensibly first discuss the actual forms of structuring. Since the contracts are standardized in practice and often only provide for the possibility of optional regulations in special clauses in individual questions, and also the typification according to the leasing decrees of the BMF is not binding for the civil law design, here follows first of all an outline of the characteristic elements of the contractual designs:
1.1. Parties to the contract It is regularly – in contrast to manufacturer and sale-and-lease-back leasing – a three-party relationship. Contracting parties are first of all a taker and a giver of a consumer or investment good. The lessor finances the leasing object and acquires ownership of it from a third party (supplier, manufacturer) – usually with the involvement of the lessee. If the lessee concludes a leasing contract directly with the manufacturer or dealer, this is referred to as direct leasing; otherwise, i.e. with the interposition of a third party as lessor, it is referred to as indirect leasing.
1.2. Right of use The lessee is granted a right of use and enjoyment by the lessor for the duration of the contract. The time period is often based on the amortization period under tax law. Depending on the term, one speaks of short leasing for contract terms of up to three years, and of long leasing for the rest. A distinction is made between real estate leasing and equipment leasing according to the object of use.
1.3. Remuneration The remuneration to be paid to the lessor, called the leasing rate, is a usage fee calculated on the basis of acquisition costs, ancillary costs, return on capital, administrative costs and entrepreneurial profit.
1.4. Assumption of risk The lessor regularly indemnifies himself against the risks of non-delivery, delay and warranty, see § 536 BGB. He protects himself against deterioration of assets in the person of the lessee by the reservation of extraordinary termination.
1.5. Realisation risk Whether the lessor or the lessee bears the risk of any further realisation of the leasing object which may be necessary after the contract is regulated in accordance with the tender and option clauses specifically provided for this purpose.
1.6. Other terms The other distinctions, in particular gross and net leasing, blanket and individual leasing, ecquipement, term and revolving leasing are of secondary importance for the legal classification.
2 Legal classification The leasing contract is a contract for the transfer of use. While the lessor usually makes a complete advance payment, the lessee’s payment is calculated in instalments over a period of time. In principle, the parties are free in the formulation of the leasing contracts with regard to the freedom of contract or private autonomy; cf. section 305 of the German Civil Code (BGB).
2.1. Typification according to leasing types The following leasing types can be distinguished in detail.
2.1.1. Operating leasing This type of leasing is characterised by the fact that leasing objects – which are at least theoretically suitable for repeated transfer – are acquired by the lessor at the instigation of the lessor in order to be subsequently transferred to the lessee against payment. Apart from a comparatively short – fixed – basic rental period, the contracts have a short period of notice for both parties. In practice, the leasing rates are higher than with finance leasing. Legally, this is a rental in the sense of §§ 535 ff. BGB. As a consequence – especially since the provisions on tenancy law of the BGB are not entirely dispositive – the lessor is precluded from passing on the material and price risk as well as the risk of timely self-delivery to the lessee by way of exemption (on the AGBG see § 9 there). In the case of contracts with non-merchants, a complete exclusion of liability for defects of title and quality is also likely to be ineffective, at least according to § 11 number 10 AGBG.
2.1.2. Manufacturer and dealer leasing In the case of these types of leasing, the supplier or a company that is at least economically or legally close to the supplier is also the lessor. Since, according to case law, the interest in sales is paramount here, the same standards apply as in the case of operating leases, cf. 2.1.2.
2.1.3. Finance leasing is characterised by the long-term nature of the contract, which can only be terminated after the expiry of a fixed basic leasing period – usually for tax reasons with a duration of between 40% and 90% of the normal useful life – whereby the financing function of the lessor comes more to the fore. From the lessor’s point of view, the acquisition costs are in principle fully amortised by the leasing instalments and any subsequent realisation. The BGH assigns this contract to tenancy law: The lessor assigns his warranty claims against the supplier to the lessee, § 398 BGB, or authorizes the lessee to assert these claims against the supplier of the leased object, analogously § 185 BGB. At the same time, the lessor releases himself from the warranty with regard to price and material risk, thus passing this on to the lessee (so-called third party transfer clause). This is not legally objectionable, because in particular § 11 No. 10 AGBG only covers contracts which are directed towards a final acquisition. In commercial dealings, no other assessment results, in particular because there is no unreasonable disadvantage to the lessee, § 9 AGBG. Full and partial amortisation Partial amortisation can lead to full amortisation from the lessor’s economic point of view by hedging the residual value. As a rule, the leasing decrees will be taken into account when determining the more detailed contractual clauses, in particular with regard to the term of the contract. In addition, the lessee usually bears the economic liquidation risk in the case of partial amortisation and receives a share in the liquidation proceeds – which exceed the residual amortisation. The VerbrKrG (formerly: Abzahlungsgesetz) applies personally and factually to contracts with final consumers if a creditor in the broadest sense grants a consumer credit for consideration, in particular as a loan or deferred payment or other financial assistance. In this case, the consumer is a natural private person to whom financing is granted without a specific purpose in connection with a profession or trade. Leasing contracts to end consumers also fall under this, § 3 II No.1. VerbrKrG. In this case, the lessee pays for the amortization of the lessor’s expenses and costs. The following standards of the VerbrKrG are inapplicable: §§ 4 I 2, 3; 13 II and 14. As a special feature, according to § 12 VerbrKrG, in the case of a – concealed – instalment transaction (cf. formerly: § 6 AbzG, today: § 18 VerbrKrG), the lessor is also entitled to a right of withdrawal in addition to termination. In addition, the familiar principles of the objection principle apply here in the case of financed hire-purchase, whereby the lessor bears the bankruptcy risk of the supplier or manufacturer – as was also the case under the old legal situation, § 9 VerbrKrG. It should be noted that circumvention transactions (in the sense of former § 6 AbzG, today: § 18 VerbrKrG) only exist in the cases of a purchase option with a right of self-designation of the lessee (purchase agreement or purchase commitment of the supplier in connection with a right of repurchase), a right of tender of the lessor (m.A.), as well as that of (almost) complete consumption of the value in use of the leased object during the basic lease term (consumption theory).
2.1.4. Real estate leasing A distinction must be made here between two variants: In the case of so-called net leasing, the lessor only assumes the financing. In the case of gross leasing with additional “full” services, the lessor has the economic and legal position of the developer. It is conceivable that the lessor, for his part, partially or completely commissions the lessee with the construction of the building and obliges him to do so. If the lessee also bears the liability risks in this case, it is a case of the lessor being exempted from liability for the building’s construction defects under tenancy law. The warranty and transfer of risk are regulated in accordance with finance leasing; partial and full amortisation agreements are conceivable.
2.1.5. Zero leasing This involves the transfer of consumer goods (usually: cars, TVs) with a fixed basic rental period in return for leasing instalments. In most cases, interest is not calculated. At the end of the basic lease term, the lessee has a right of purchase, or the lessor a right of tender, against payment of the agreed residual purchase price. For further details in the event that the lessee is the ultimate consumer, reference is made here to Section on the special features of consumer contracts.
2.1.6. Sale-and-lease-back leasing The characteristic feature of this variant is that the lessor procures or has procured the leasing object himself, i.e. it is made available by the lessee to the lessor by direct transfer of ownership. This also includes the case of a prior transfer of ownership by way of security to the lessor. With regard to transactions with end consumers, reference is also made here to section to the special features.
2.2. Now some significant obligations are to be illuminated, which concern the relationship of the parties to each other, and from there – depending upon concrete arrangement in the individual case – also the legal classification of leasing contracts can serve.
2.2.1. Acceptance, takeover, delivery The Lessee shall submit a declaration of acceptance or takeover upon acceptance of the Leasehold Item. This declaration can have two consequences: – Firstly, the lessor’s payment of the purchase price to the supplier can become due, and in addition, the warranty can be set in motion, together with the – in commercial dealings usually short – period for giving notice of defects in accordance with § 377 of the German Commercial Code (HGB). – In addition, the payment of the first leasing instalment to the lessor usually becomes due upon acceptance. The decisive factor for the lessee in this context is how long he must feel bound by the leasing contract if delivery is not made on time: According to the – excludable – regulation in tenancy law, § 542 BGB, the lessee would be entitled to terminate the contract without notice.
2.2.2. Granting of use The granting of use is the central primary obligation of the lessor. The Supplier shall act at the instigation of the Lessor as the Lessor’s vicarious agent, § 278 of the German Civil Code, to the extent that and in that the Lessor makes the Leased Property available to the Lessee.
2.2.3. Maintenance Legally permissible are the transfer of damage, loss and destruction of the leasing object to the lessee, as well as the obligation of the lessee to maintain, care for and, if necessary, service the leasing object. Reference should be made to the case law of the Federal Court of Justice (BGH), according to which (only) in the case of motor vehicle leasing the lessee has a right of termination without notice in the event of the destruction of or substantial damage to the leased item. The problem here is the handling if, in the event of damage, a reduction is made with regard to the claims for compensation in consideration of the special purchase price discounts or price reductions granted only to the lessor.
2.2.4. Payment obligations With regard to the parties’ payment obligations, a distinction can be made between different stages in the performance of the contract: Lease instalments If the lessor and lessee have agreed on a fixed term for the contract – regardless of whether it is an operating or finance lease – the receivable already arises in the amount of the total lease instalments for this period: the receivable is only due in the amount of the instalments not yet due for payment. From this follows in the case of forfaiting, provided that the lessee is aware of the assignment within the meaning of § 407 BGB, that subsequent agreements between the parties to the leasing contract – in particular deferment, remission, instalment settlement, cancellation of the contract – do not apply vis-à-vis the assignee. Damage due to non-performance If the lessee terminates a leasing contract concluded for an indefinite period with partial amortisation without notice due to default in payment, § 544 of the German Civil Code (BGB), this gives rise to a claim for damages in his favour: the amount is calculated according to the so-called interest in performance, i.e. the lessor is to be placed in the same economic position as if the contract had been duly performed. Included in this compensation for damages due to non-performance is also the loss of profit, whereby, however, additional proceeds from premature sale or a residual value in favour of the lessee must be taken into account. The lessee cannot object that the leasing object could have been leased elsewhere and owes the surrender of the leasing object from the effective termination, § 556 BGB. Compensation for use Upon expiry of the leasing contract – regardless of whether at the time stipulated in the contract or after extraordinary termination – further instalments may have to be paid as compensation in accordance with § 557 BGB due to “withholding of the leased object” if the lessor does not surrender the leased object on time and the parties have not agreed on a purchase or an extension of the leasing contract. Final payment If the lessee terminates the contract before the expiry of the contractually agreed term on the basis of his right to terminate the contract in accordance with § 564 of the German Civil Code (BGB), he is obliged to make a final payment: this includes the full amortisation plus calculated profit. Here too – as in the case of extraordinary termination – it applies that in the absence of an agreement on the calculation of damages for non-performance or final payment, the interest in performance must be calculated in concrete terms, which means that the lessor may have no choice but to disclose his calculation.
2.2.5. Warranty The following aspects can be considered in connection with the warranty: Exclusion of warranty The complete exclusion of warranty on the part of the lessor is only effective if all warranty claims arising from the acquisition of the leasing object have been transferred to the lessee – either as an assignment or as an authorisation to exercise. It is also a prerequisite for effectiveness that the lessor does not specifically reserve the right to assert the transferred rights himself. In the relationship between the lessor and the supplier or manufacturer of the leased item, §§ 377, 378 HGB (German Commercial Code) usually apply, with the consequence that the lessor will oblige the lessee – irrespective of the latter’s status as a merchant – to inspect the leased item without delay and, if necessary, to send a timely notice of defects. In the absence of such an agreement, the lessee has no obligation to give notice of defects and is therefore not liable for the consequences of the breach of the obligation to give notice of defects. Conversion The lessor must accept the legal consequences of the assertion of warranty claims, in particular conversion: The conversion leads to a reversal of the transaction between the lessor and the supplier or manufacturer, so that the obligation to return the leased object is offset by a claim for repayment of the purchase price. According to the rules on the cessation of business, the lessor loses the right to the lease payments from the lessee, even if the leased object has already been used. The compensation within the scope of the reversal is carried out according to the law of enrichment in accordance with the benefits drawn by the lessee. The lessor bears the supplier’s bankruptcy risk, so that in the event of the supplier’s bankruptcy the lessor and lessee are deemed to have effectively completed the conversion to the extent that this is no longer possible due to the supplier’s bankruptcy. Therefore, the lessee is not worse off in the event of bankruptcy. The lessee’s obligation to pay (further) lease instalments is suspended from the moment of the action for conversion against the supplier. The lessee will have to exercise particular care when returning the leased object to the supplier on behalf of the lessor in order not to become liable for damages, because the lessor may thereby lose a means of exerting pressure – the return only concurrently with reimbursement of the purchase price.
2.2.6. Settlement of claims In the settlement of claims, especially in the case of vehicle leasing, the compensation for a total loss is measured according to the lessor’s expenses for the replacement of the leased asset. The courts deduct the usual dealer or bulk buyer discounts from the eligible expenses: From the lessee’s point of view, this may be difficult to accept, so that the lessee then examines whether termination of the leasing contract without notice would have more favourable economic consequences for him.
2.2.7. Options The leasing contract can contain various options, § 305 BGB. The option is a right which the other contracting party can exercise at his own discretion in order to bring about the legal consequences he desires – and usually with conditions specified in advance. Purchase option Leasing agreements may provide for a right of the purchaser to purchase the leased asset at the end of the contractual term. In this case, different regulations regarding a final payment are conceivable; in particular, a purchase price that has already been determined or a purchase price according to an appraisal report. In the event of exercise, this obligation under the law of obligations must – depending on the form – still be executed by transfer of ownership, or else it comes into effect automatically by virtue of the conditions on receipt of the lessee’s declaration of exercise by the lessor. Right of designation In this case, the lessee must designate a third party with whom the lessor must then contract. In most cases, these clauses are also to be interpreted to the effect that the lessee may also name himself. Extension option Such clauses entitle the lessee to demand that the lessor continue to provide the leased asset after the expiry of the basic lease term. The conditions are usually fixed in advance, and are usually significantly cheaper compared to the basic rental period. This is also an option; more rarely an extension subject to a corresponding declaration to the lessor. Right of tender This is the right of the lessor to offer the leased asset to the lessee – obligating him to do so – usually for purchase, rarely for lease extension. The price is usually based on the residual amortization. On the other hand, the lessor is not obliged to make use of his right of tender and is therefore in a position to protect himself economically from reductions in value or to make use of increases in the value of the leased object for himself as he sees fit. Liquidation option Traditionally, the lessor is obliged to sell the leased asset on the open market at the end of the basic lease term. If the proceeds are lower than the residual amortisation – which has already been determined – the lessee must make a final payment. If the proceeds are higher, the lessee normally participates in the excess difference to the extent of a previously agreed percentage. In this context, also due to the leasing decree of the BMF, a participation quota of up to 75% is usual for the lessee.
2.2.8. Obligation to return the leased property When the leasing contract expires, the lessor is entitled to the return of the leased property, cf. § 556 BGB.
2.3. Classification and categorisation Classification is important because it is only then that the examination of GTCs against the legal model on the one hand and the filling of gaps in the case of ineffective contractual terms on the other hand becomes possible with certainty. In consistent case law of the BGH, the classification is based on the main obligations of the parties, and only alternatively on economic considerations – see § 18 VerbrKrG. It is therefore justified to characterise the leasing contract as a rental contract, as already demonstrated and illustrated above in numerous individual points. The AGBG is applicable here with restrictions – see §§ 23, 1, 2 AGBG – and the VerbrKrG in the cases mentioned. In the case of operating leasing with an option to purchase, there is widespread agreement that it is a hire purchase – at least insofar as the subsequent purchase is contractually guaranteed when the leasing contract is concluded. As a result, the review of content under the AGBG must be based on the provisions of the law of tenancy and also the law of sale. The literature attempts to classify finance leasing in a wide variety of ways, using different arguments: The spectrum ranges from the purchase, the loan, the agency, to the usufruct, the rental agreement, to the lease, to the contract sui generis. Leasing differs from purchase by the existence of a continuing obligation, from hire-purchase because an option is not mandatory and partial amortization contracts also occur, and from financed purchase by the circumstance of a purchase directly from the lessor at the supplier or manufacturer. The BGH treats finance leasing as an atypical tenancy agreement, with the special features dealt with under points 1 ff. so that, in principle, the provisions of tenancy law – and, for the rest, supplementary contractual interpretations – apply. This also corresponds to the main purpose and motive of the agreement, namely primarily to achieve easier financing by transferring use to the lessee on a rental basis, as it were. This does not change if, as is the case here, §§ 536 – 539 BGB (German Civil Code) do not apply to the leasing contract and special conditions are provided for in addition, § 305 BGB. The legal classification thus follows the above typifications.
Bibliography for Part I: Eckstein, Wolfram: Leasing von Anlagegütern, Freiburg 1984 Feinen, Klaus: Das Leasinggeschäft, Frankfurt 1990 Spittler, Hans-Joachim: Leasing für die Praxis, Cologne 1990 Westphalen, Graf Friedrich von: The Leasing Contract, Cologne 1992

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Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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