Financing the purchase of equipment is a crucial step in the development or modernisation of any business. These investments, which are often costly, are part of a wider framework of the company law. Among the business finance solutions available, equipment leasing offers a highly flexible alternative to traditional bank credit. But how does it work? What are its advantages and limitations? In this article, we explore how equipment leasing works, its strengths and what differentiates it from other forms of finance. For personalised support and an in-depth legal analysis of your project, and to find the most suitable solution, please consult our law firm specialises in credit law.
Understanding the equipment leasing mechanism
Equipment leasing is a financing transaction governed by articles L. 313-7 et seq. of the French Monetary and Financial Code. It is a three-way contract under which a finance company, the lessor, buys a business asset that you have chosen from a supplier and leases it back to you for a fixed period. The leasing company is a credit institution approved and supervised by the Autorité de contrôle prudentiel et de résolution (ACPR). As such, its liability may be incurred depending on the circumstances, particularly in terms of its duty to warn. The fundamental difference lies in the end of the contract: you then have an option to acquire the property permanently and become its owner, in return for a price (the residual value) fixed at the outset. This mechanism is accompanied by specific guarantees and securitieswhich has recently been reformed.
What assets can be financed by equipment leasing?
The law mainly targets capital goods for professional use and tooling equipment. This covers a wide range of equipment, both new and used, and of all sizes:
- Business vehicles: company cars, fleet of vans, trucks.
- Industrial equipment: machine tools, industrial presses, production lines.
- Construction equipment: site machinery, cranes.
- IT and office equipment: servers, computers, professional photocopiers.
- Medical equipment for the healthcare professions.
The specific case of intangible assets: software and business goodwill
Equipment leasing can be used to finance intangible assets under certain conditions. Software can be included in the transaction if it is essential to the operation of the main equipment being financed and forms a coherent whole with it. Similarly, certain elements of a business, such as leasehold rights, can be leased, but these complex arrangements require in-depth legal analysis to ensure the security of the transaction.
Advantages and pitfalls of equipment leasing
Equipment leasing offers great flexibility and a number of advantages for running a business. It allows full financing, often at 100% of the value of the asset, without requiring an initial contribution, thus preserving cash for other needs. From an accounting point of view, the equipment does not appear on the assets side of the balance sheet, which lightens its structure and keeps the company's debt capacity intact. Nevertheless, it is essential to understand the implications in the event of company difficulties. For tax purposes, rental income is deductible from the income statement as an operating expense, which reduces the amount of tax payable. VAT paid on these rents is also recoverable. For a complete strategy, it is often useful to consult the experts in corporate taxation. However, you need to be careful: the overall cost of the deal, which includes the interest rate, can be higher than that of a conventional loan, and contracts are often rigid, making it difficult to get out early without penalty. The payment of a deposit or increased first rent is common and must be taken into account when calculating the total cost of this expense.
The legal framework for leasing: publicity and enforceability of the contract
To be fully effective, equipment leasing contracts must be publicised. In accordance with articles L. 313-10 and R. 313-3 et seq. of the French Monetary and Financial Code, the transaction must be entered in a special register held at the registry of the commercial court within whose jurisdiction the lessee (whether a public limited company or other) has its registered office. This formality, which is the responsibility of the lessor, is fundamental: it makes the lessor's ownership of the equipment enforceable against third parties. In other words, without this registration, if your company runs into difficulties, other creditors could try to seize the equipment, even though it does not belong to you. Publicity ensures the legal certainty of the transaction, particularly in the context of insolvency proceedings.
Lessor's liability and duty to warn
As a credit institution, the lessor has a duty to warn the lessee, who is considered to be "uninformed". This obligation, based on case law, requires the bank or lender to ensure, on the basis of the documentation provided, that the commitment is not excessive in relation to the borrower's financial capacity and to warn the borrower of the risks of indebtedness. A lessee is deemed to be uninformed if he or she does not have the necessary skills and experience to assess the scope of the transaction. If the lessor fails in this duty, it may be held liable, leading to compensation for the loss suffered, often corresponding to a loss of opportunity not to enter into the contract.
Limitation periods for liability claims
Liability claims for breach of the duty to warn are subject to a limitation period of five years. The starting point of this period is an important issue. Case law sets it not at the date on which the contract was concluded, but at the date on which the damage occurred. In practical terms, this is often the day of the first payment incident that is not remedied, the moment when the risk of indebtedness becomes a tangible reality for the borrower and information about his situation is given to the lender.
Guarantees and sureties: how can leasing transactions be secured?
The fact that the lessor retains ownership of the equipment constitutes the main security for the transaction. However, additional security is often required to cover the risk of non-payment of rent. A personal guarantee from the manager is the most common form of security. A security deposit may also be required at the start of the contract. Other security interests, such as a non-possessory pledge over other company assets, may also be requested to secure the financing. These guarantees enable the lender to protect itself against default by the lessee.
The impact of the 2021 reform of security law
Order no. 2021-1192 of 15 September 2021 modernised the law on movable securities. In particular, it simplified and clarified the rules governing non-possessory pledges, making it easier to create and publicise them. This reform strengthens the effectiveness of the guarantees that lessors can take out. By making securities more secure and simpler to implement, it contributes to making rental financing transactions more secure for lenders.
End of contract and termination: what are the practical and financial consequences?
When the contract expires, the lessee is free to choose between three options: return the equipment, renew it under a new contract, or exercise the purchase option by paying the agreed residual value to become the owner of the asset. The situation becomes more complicated in the event of early termination of the contract, which has significant financial consequences.
Managing lost or stolen equipment
Leasing contracts systematically provide that the risk of loss or theft of the equipment is borne by the lessee. Theft is not considered to be a case of force majeure that would relieve the lessee of its obligations. In the event of a claim, the company remains liable to pay the rent. This is why it is essential to take out "financial loss" insurance. It covers the payment of compensation due to the lessor and protects the company's cash flow.
Compensation for early termination and moderation by the judge
If the contract is terminated for non-payment of rent, the lessor is entitled to claim a termination indemnity. This compensation, which is often equal to the total outstanding rental payments, is referred to in case law as a penalty clause. As such, the judge has the power to moderate it if the amount is deemed "manifestly excessive" in relation to the loss actually suffered by the lessor. This adjustment helps to rebalance the contract and protect the tenant against disproportionate penalties.
Assignment of the leasing contract during its term
Assignment of the leasing contract by the lessee to another company is possible, but is subject to the written agreement of the lessor. In accordance with article 1216-1 of the French Civil Code, if the lessor expressly agrees, the assignment may discharge the original lessee for the future. However, in the absence of such an express release, the assignor remains jointly and severally liable with the new lessee for performance of the contract. This joint and several liability constitutes a guarantee for the lessor.
Leasing in the face of company difficulties (collective proceedings)
The opening of insolvency, receivership or liquidation proceedings against the lessee has a direct impact on the term of the leasing contract. By virtue of the principle of the continuation of existing contracts, the commencement of proceedings does not automatically terminate the lease. The administrator or liquidator, under the control of the court, then has the choice of requiring the continuation of the contract or terminating it, a decision that depends on the size of the business and its chances of survival.
Claim on the equipment by the lessor
If the contract is not continued, the lessor, as owner, may recover its property. To do this, he must bring an action to reclaim it. The importance of publicising the contract at the registry takes on its full meaning here: if this formality has been completed before the opening judgment, the lessor does not have to prove his right of ownership, which greatly facilitates the return of the equipment (article L. 624-10 of the French Commercial Code).
Vehicles: seizure and interaction with vehicle pledges
In the case of land motor vehicles, specific mechanisms such as seizure and attachment enable the lessor to recover the asset in the event of non-payment. In the context of insolvency proceedings, this right of ownership takes precedence over any pledges placed on the vehicle by other creditors. The procedure for immobilising the vehicle and returning it to the owner is governed by the French Code of Civil Enforcement Procedures and ensures that the lessor's rights are effectively protected.
Leasing, financial leasing, LOA: what are the differences?
It is essential not to confuse leasing with similar formulas. The main difference with financial hire (or "renting") is that there is no purchase option. Finance leases are simple leases, often accompanied by services, at the end of which the asset is returned. The lease with option to buy (LOA)This is very similar to leasing, but the latter is reserved for professional use. Players such as Bpifrance, Crédit Agricole and Crédit Mutuel often offer these different formulas. Finally, the hire-purchase is distinguished by the fact that the transfer of ownership is often automatic at the end of the contract, whereas leasing is based on a simple option (unilateral promise) that the lessee is free to exercise or not.
Equipment leasing in an international context
For cross-border transactions, particularly within a group, the 1988 Ottawa Convention on International Financial Leasing provides a harmonised legal framework. It applies when the lessor and lessee are established in different signatory states. Its main purpose is to secure economic transactions by recognising the lessor's right of ownership and making it enforceable against third parties and against the lessee's insolvency proceedings abroad. It confirms the purely monetary role of the lessor and thus facilitates the financing of equipment across borders, often as part of an international partnership.
Equipment leasing is a powerful and flexible financing tool, but its legal complexity should not be underestimated. To assess whether it is the most appropriate solution for your investment project and your company's specific situation, please contact our credit law firm for a personalised analysis of your options.
Frequently asked questions
What is equipment leasing?
Equipment leasing is a contract in which a financial company (credit institution) buys a piece of equipment for a company and rents it back to the company for a fixed period, with an option to buy it at the end of the contract for a price agreed in advance, enabling the company to become the owner.
What is the main difference with financial leasing?
The fundamental difference is the purchase option. Leasing systematically includes a promise to sell at the end of the contract, which is not the case with pure financial leasing, where the equipment must be returned.
Can a leasing contract be cancelled before its term?
Yes, but early termination generally entails the payment of compensation, often equal to all the outstanding rent. This indemnity, known as a penalty clause, may however be reduced by a judge if the amount is deemed to be manifestly excessive.
What happens if my company is in receivership?
The contract is not automatically terminated. The administrator or liquidator may choose to continue it. If the contract is terminated, the lessor, as the owner, can claim the return of the equipment, which is easier to do if the contract has been published at the commercial court registry.
Is the lessor liable if the equipment is defective?
In general, no. Leasing contracts contain clauses that transfer liability and warranty claims against the supplier directly to the lessee (the renting company).
What are the options at the end of the leasing contract?
At the end of the contract, the company has three options: buy the equipment by exercising the purchase option to become the owner, return the equipment to the lessor, or renew the lease for a further period.
EN 
FR