Equipment leasingAlthough it offers many advantages to the lessee, leasing represents an investment and therefore a risk for the financial institution that buys the property and makes it available. How does the lessor protect itself against possible hazards, such as non-payment of rent or damage to the equipment? What happens when the contract comes to an end? Understanding these aspects is useful, even for you as a lessee, because they structure the contractual relationship and determine the consequences of certain events. This article explores the main guarantees that secure the transaction for the lessor, as well as the different ways in which a leasing contract can be terminated, either at its normal expiry date or early.
Guarantees protecting the lessor
Several legal and contractual mechanisms are designed to secure the transaction for the leasing company.
Property ownership: the fundamental guarantee
The cornerstone of the lessor's security is that it remains the owner of the equipment for the duration of the lease. You are only the lessee, even if the rental payments you make include a portion corresponding to the financial depreciation of the asset. This retention of ownership (article 544 of the French Civil Code) is the most essential guarantee: in the event of serious difficulties, and in particular of collective procedure As far as you are concerned, the lessor may, subject to certain conditions, recover "his" property, which is not part of the joint pledge of your other creditors.
The importance of legal publicity
In order for this right of ownership to be fully effective vis-à-vis third parties (other creditors, a potential buyer if you try to sell the property illegally, etc.), the law requires that the following conditions be met advertising equipment leasing contracts. This information is entered in a special register kept at the registry of the relevant commercial court (usually the court where your registered office is located). The procedures are set out in articles R. 313-3 et seq of the French Monetary and Financial Code.
The stakes are high: if the lessor fails to advertise properly before the opening of any insolvency proceedings concerning you, his right of ownership may be declared null and void. not enforceable to the proceedings. In practical terms, this means that the lessor could lose his right to recover the equipment, which would then be considered to be one of your assets that creditors could seize. Publicity is therefore a decisive formality for the solidity of the lessor's guarantee.
Guarantees: a commitment not to be taken lightly
It is very common for the lessor to ask for personal guarantees to cover your commitments. The most common is the surety bondThis is often requested from the head of the lessee company or the parent company. The guarantor undertakes to pay in place of the lessee if the latter defaults.
The scope of this commitment needs to be examined carefully: does the guarantor guarantee only the unpaid rent, or also the termination indemnity due in the event of early termination of the contract? Contracts generally expressly state that the guarantee covers everything, but the legal principle (article 2015 of the Civil Code) is a rather restrictive interpretation of the guarantor's undertaking. Guarantees should be distinguished from "autonomous guarantees" (or first demand guarantees), which are rarer in this context, and which are commitments independent of the principal debt.
In the event of insolvency proceedings against the tenant, the situation of the guarantor is special: he or she generally remains liable for debts incurred prior to the opening of insolvency proceedings (unpaid rent) and does not benefit from the suspension of interest that may apply to the principal debtor.
Penalty clause in the event of early termination
What happens if you stop paying your lease instalments and the lessor terminates the contract early? In addition to the return of the equipment and payment of the outstanding lease instalments, leasing contracts almost always contain a penalty clause. This clause provides for the payment of a fixed indemnity to compensate the lessor for the loss suffered as a result of the early termination.
This indemnity is often calculated on the basis of the sum of the remaining lease payments up to the scheduled end of the contract, sometimes increased by the theoretical residual value of the asset, and possibly reduced by the price obtained by the lessor by reselling the recovered equipment.
Historically, these clauses could be very onerous. This is why the law (articles 1152 and 1231 of the Civil Code, amended in 1975) gave judges the power to reduce the amount of this compensation if it is deemed manifestly excessive. This power of the judge is a matter of public policy, meaning that no clause in the contract can override it. The judge will assess whether the penalty is excessive by comparing it to the loss actually suffered by the lessor, and will take into account any partial performance of the contract that has already taken place. However, the penalty clause has a dual function: to compensate the lessor and to encourage you to meet your commitments.
The guarantee deposit
Finally, it is common for a security deposit is requested at the start of the contract. This is a sum of money that you pay to the lessor as a guarantee that you will fulfil your obligations. This deposit cannot normally be used to offset unpaid rent during the term of the contract. At the end of the tenancy, if you have fulfilled all your obligations, the deposit is returned to you. If not, the landlord can use it to cover any outstanding sums (rent, repair costs, etc.).
The "normal" end of the contract: the tenant's options
If everything goes according to plan, the leasing contract comes to an end on the date initially agreed, after the end of the so-called "irrevocable" period. At that point, an essential feature of leasing comes into play: you have a option as to the fate of the equipment. Generally speaking, there are three options open to you.
Option 1: Return the equipment
You may choose simply to return the equipment to the lessor. In this case, you must return it in a good state of maintenance and repair, taking into account the normal wear and tear associated with its use during the term of the contract. If the equipment shows abnormal wear and tear or has suffered significant damage, you may be billed for the cost of repairing it. The contract often specifies the terms and conditions of this return (location, deadlines, any condition assessment).
Option 2: Renew the contract
If the equipment is still of use to you and the contract so provides, you can opt to renew the lease. This is not a simple extension, but the conclusion of a new contract. new rental contract. The terms and conditions (duration, amount of rent, termination frequency) are then renegotiated. The rent for this second period is often lower, as the initial cost of the property has largely been amortised for the lessor.
Option 3: Buying the property (exercising the option)
This is the most common outcome, and often the one that makes the most economic sense for the lessee. From the outset, the leasing contract includes a unilateral undertaking to sell of the asset by the lessor to you. At the end of the contract, you can "exercise this option", i.e. decide to buy the equipment.
- You must have fulfilled all your obligations to have paid all the rent due during the rental period.
- You must express your wishes to buy in accordance with the terms and conditions of the contract (often by registered letter a few months before the expiry date).
- You must pay the option pricealso known as residual value. This price is set when the initial contract is signed and takes account (at least in part) of the rent you have already paid. It is generally well below the market value of the property at that time.
Le effective transfer of ownership The transfer of ownership to you often only takes place once the residual value has been paid in full. It is not uncommon for contracts to include a sort of 'retention of title clause' on this final payment: you do not become the full owner until the option price has been paid in full.
Early termination of the contract
The leasing contract can also be terminated before the end of the initial term in various circumstances.
Amicable termination
As with any contract, leasing can be terminated by mutual agreement between you and the lessor, even during the irrevocable period. The financial terms of this amicable termination (including any compensation) are negotiated between the parties.
Termination for fault
This is the most conflictual case. If one of the parties fails to meet its obligations, the other can request termination of the contract (under article 1184 of the French Civil Code). In practice, it is mainly the tenant's failure to comply (repeated non-payment of rent, non-compliant use, lack of insurance, attempted unauthorised transfer, etc.) that leads to this outcome.
Contracts almost always include a express resolutory clause After a formal notice has been served and no action has been taken within a specified period, the contract is automatically terminated, without the need to go before a judge to have this established (although legal action is often necessary to obtain enforcement of the consequences).
- Immediate return equipment.
- Payment of all overdue and unpaid rent.
- Payment ofearly termination indemnitycalculated in accordance with the penalty clause set out in the contract (see above).
The impact of rescinding the initial sales contract
One particular case of early termination relates to the interdependence between the leasing contract and the initial sales contract between the supplier and the lessor. If this sales contract is subsequently terminated (for example, as a result of a warranty claim for a major latent defect that you, as the lessor's agent, have successfully brought against the supplier), the case law considers that the leasing contract, which has become devoid of purpose, is also terminated. automatically terminated (it "falls" as a result of the disappearance of the sale).
However, you should be aware that if the leasing contract is terminated for the future in this case, the specific clauses that have been included to organise the future leases will not apply. the financial consequences of this particular situation (for example, a clause stipulating how the lessor will be compensated for the loss of its investment) generally remain applicable.
The end of a leasing contract, whether normal or anticipated, raises important legal and financial issues. Understanding the guarantee mechanisms and the various possible outcomes will help you to anticipate and better manage this key stage.
Anticipating the end of your leasing contract, choosing the best option for your business or dealing with early termination requires a precise analysis of your contract and your situation. Our team will be happy to help you advising and securing your interests.
Sources
- French Monetary and Financial Code: articles R. 313-3 et seq.
- Civil Code: articles 544 (Ownership), 1134 (Binding force of contracts), 1152 (Penalty clause), 1184 (Resolutory condition), 1231 (Partial performance and penalty clause), 1722 (Loss of the leased property), 2011 et seq. (Surety bond), 2279 (Possession worth title - movables).
- Law no. 80-335 of 12 May 1980 (retention of title clause).
- Constant case law (in particular Cass. Ch. mixte, 23 November 1990 on the link between cancellation of the sale and cancellation of the financial lease).
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