Faced with the challenges of financing business equipment, financial leasing is emerging as an attractive solution. This method of financing allows companies to obtain the use of an asset without using up their cash. In particular, it meets the need for equipment that rapidly becomes obsolete, such as office or technical equipment.
The growing success of financial leasing can be seen in the figures. According to the Association Française des Sociétés Financières (French Association of Finance Companies), the volume of investment through financial leasing has reached almost €14 billion. This steady growth reflects the fact that leasing meets the needs of today's entrepreneurs.
Understanding financial leasing
Financial leasing is defined as a rental financing technique that enables a lessee company to obtain the use of an asset without becoming the owner of the equipment. It is based on a tripartite mechanism involving a customer, a supplier and a financial institution.
Its main distinguishing feature is the absence of a forward purchase option. This clearly distinguishes it from leasing, which does offer this option. At the end of the term, the lessee must either return the equipment or request an extension of the contract period.
The absence of a purchase option has a major legal consequence: financial leasing is not considered to be a credit transaction within the meaning of the Monetary and Financial Code. To find out more about the distinctions between financial leasing and financial leasing, see our article on definition and differences with leasing details these aspects.
The operation can follow two distinct patterns. In the first, the finance company is involved from the outset. In the second, the company begins by concluding the contract with the partner, who then transfers the lease to a financing organisation.
Key stages in the finance lease contract
The formation of a contract is governed by the general rules of the law of obligations. Consent must be free and informed. Vices of consent, particularly fraud, are sometimes invoked in disputes. Consumer law may apply on a residual basis to off-premises leases.
There are some specific points to bear in mind when signing a contract. Clauses that create a significant imbalance may be challenged under article 1171 of the Civil Code. The guarantees required, such as surety bonds, are subject to special rules. To make this crucial issue more secure, read our analysis on the conclusion and validity of the contract.
The performance of the contract gives rise to specific obligations for each party. The lessor's main obligation is to deliver the goods. The end customer must pay the fixed rent and use the vehicle or furniture for its intended purpose. These obligations are often set out in specific clauses, with the bank seeking to limit its role to that of a mere financier.
The period ends either normally on the due date or early in the event of default. Termination for non-payment generally triggers an indemnity corresponding to the outstanding rent. This penalty clause may be judicially adjusted if the amount is manifestly excessive.
Legal points to watch
Contractual interdependence is a major issue. Since a landmark ruling in 2013, the French Supreme Court has held that contracts forming part of a finance lease are interdependent. If one contract is terminated, the others lapse.
This solution, codified in part in article 1186 of the Civil Code, overturns the initial structure of the transaction. Severability clauses that attempt to avoid this mechanism are deemed unwritten. The practical implications of this interdependence are detailed in our article on this subject.
Insolvency proceedings radically alter the contract. The opening of proceedings against the tenant does not result in automatic termination. The administrator has the option of continuing the contract or terminating it. The owner of the equipment must navigate between his status as creditor and owner.
In the event of non-continuation, the lessor may reclaim the property using a specific procedure. This action must comply with the three-month time limit set out in article L. 624-9 of the French Commercial Code. These aspects are developed in our analysis of end-of-contract situations and company crises.
Leasing strategy
Financial leasing offers a number of advantages for companies. The impact on the income statement is immediately positive, as payments are staggered. The accounting treatment offers additional advantages, with the lease payments constituting deductible expenses without any contribution to the balance sheet. For certain assets with a short economic life, this solution avoids ownership of devalued equipment, making it easier to resell.
Operating leases are particularly suitable for computer hardware, software leasing and office equipment. It is also suitable for specialised equipment in various sectors: medical, industrial and agricultural. Optimising the use of leasing requires prior analysis of the asset's life cycle and residual value.
There are, however, some essential precautions to be taken. Particular care needs to be taken when analysing contractual clauses, especially those relating to the frequency of rental payments (linear, degressive or increased) and additional insurance costs. The relationship with associated contracts (maintenance, service) must also be carefully considered. Our commercial contracts lawyers can help you with this preventive approach.
Conclusion
Financial leasing is a particularly suitable solution for modern businesses. Its flexibility and positive impact on cash flow make it a valuable tool in financial strategy. However, its complex legal dimension requires an informed approach.
If you are considering this type of financing, personalised legal support will enable you to optimise its benefits while controlling its risks. Our firm can offer you a new contract at every stage of the transaction, from the initial negotiations to the management of any difficulties that may arise.
Frequently asked questions
What is the main difference between financial leasing and financial leasing?
Financial leasing does not include a purchase option at the end of the term, unlike leasing, which allows the lessee to become the owner of the asset at the end of the contract.
Is financial leasing considered to be a credit transaction?
No, case law is consistent on this point: without a purchase option, financial leasing is not a credit transaction within the meaning of the Monetary and Financial Code.
Can consumer law be applied to a professional finance lease?
Yes, for off-premises contracts with a professional with fewer than six employees, if the subject of the contract does not form part of the professional's main activity.
What is contractual interdependence in financial leasing?
This is the principle established by case law, according to which the contracts forming a financial leasing transaction (hire, maintenance, supply) are linked, with the termination of one resulting in the invalidity of the others.
Can a tenant stop paying rent if the equipment is no longer working?
In principle not, but case law on contractual interdependence may allow the lease contract to lapse if the maintenance or supply contract has previously been cancelled.
Are penalty clauses providing for payment of outstanding rent valid?
Yes, they are valid, but they may be reduced by the courts if the amount is manifestly excessive in relation to the loss actually suffered by the lessor.
What happens if insolvency proceedings are brought against the tenant?
The finance lease is maintained as a "current contract" and the insolvency administrator may choose to continue or terminate it, although the opening of the proceedings does not automatically result in its termination.
What are the tenant's options at the end of the contract?
When the contract expires, the tenant must either return the property in accordance with the conditions laid down, or extend the lease in accordance with the terms and conditions set out in the contract.
Does the landlord have a duty to warn the tenant?
The case law is divided, with some rulings recognising the existence of a duty to warn that rents must be in line with the tenant's financial capacity, while others reject it given the relative simplicity of the operation.
Can a finance lease be assigned to a third party?
Yes, the contract can be assigned provided that the assignment is contractually agreed or accepted by the tenant, with formal notification of the assignment.
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