Entering into a finance lease requires particular care. This technique, favoured by many companies for its positive impact on cash flow, involves significant legal commitments. The contract formalises a triangular relationship between lessee, lessor and supplier. Its validity is based on specific conditions that the parties must master to secure their commitment.
The abundance of litigation in this area bears witness to the practical difficulties encountered. The courts are regularly seized with questions relating to defects in consent, the application of consumer law and the guarantees required. Every stage in the formation of a contract therefore warrants increased vigilance.
Specific conditions of validity
First and foremost, finance leases are governed by the classic rules of common law. Article 1128 of the Civil Code requires the consent of the parties, their capacity to enter into a contract, and that the content of the contract be lawful and certain. These fundamental conditions fully apply to financial leases, as the Paris Court of Appeal pointed out in its ruling of 21 April 2023.
Consent is a major issue. It must be free and informed, and free from any defect. In practice, tenants sometimes try to invoke error to escape their obligations. This strategy often proves unsuccessful when the contract clearly sets out the commitments made. On 26 January 2023, the Douai Court of Appeal ruled that a tenant could not claim to have made a mistake when his obligations were explicitly detailed.
Fraud, on the other hand, sometimes offers a way out. It is generally alleged against the supplier rather than the finance company. If the fraudulent manoeuvre is established, the nullity of the supply contract may result in the nullity of the lease contract. A recent ruling by the Court of Cassation on 19 April 2023 stated that "an error caused by the fraud of a third party entails the nullity of the contract where it relates to the substance of the undertaking".
The subject of the contract must also meet certain conditions. It must be lawful and in the trade. A ruling by the Paris Court of Appeal on 2 May 2017 annulled a contract for a medical device that lacked CE certification. In this caseIt was the unlawfulness of the subject matter that was the basis for invalidating the contract.
Protection for professional tenants
Contrary to popular belief, consumer law can sometimes be applied to business finance leases. This residual protection offers valuable guarantees to the lessee in certain circumstances.
The Consumer Code applies mainly to contracts concluded "off-premises". Article L. 221-3 extends certain protections to contracts between professionals when three cumulative conditions are met: the contract is concluded off-premises, the professional has five or fewer employees, and the subject of the contract is outside the professional's main business.
The courts take a favourable view of this last condition. Recent case law considers that a contract does not fall within the scope of the principal activity if it does not correspond exactly to it. For example, on 24 January 2023, the Amiens Court of Appeal ruled that a telephone switchboard, although useful to a pharmacy, was not part of its principal activity. Similarly, on 13 April 2022, the Agen Court of Appeal ruled that a website rented by a roofer was not part of his main business.
One controversial issue concerns the classification of finance leases as financial services. Some finance companies try to avoid the protective formalities by invoking article L. 221-2, 4° of the Consumer Code, which excludes contracts relating to financial services. The majority of case law rejects this argument. In its ruling of 11 May 2023, the Lyon Court of Appeal clearly stated that "the simple leasing of movable property cannot be considered as a service relating to banking, credit or insurance".
These protections offer essential guarantees to tenants, such as a cooling-off period or enhanced pre-contractual information, the details of which are explained in our article on performance of the finance lease.
Significant imbalance in rights and obligations
The question of contractual imbalance deserves attention. It can be approached from two angles: that of the Commercial Code and that of the Civil Code.
Article L. 442-1, I, 2° of the French Commercial Code punishes "subjecting or attempting to subject the other party to obligations that create a significant imbalance in the rights and obligations of the parties". However, in a ruling dated 15 January 2020, the French Supreme Court (Cour de cassation) ruled that this text does not apply to approved credit institutions and finance companies. This exclusion considerably limits the scope of this protection for finance leases entered into with approved companies.
The Civil Code offers an alternative since the reform of the law of obligations. Article 1171 states that "any non-negotiable clause, determined in advance by one of the parties, which creates a significant imbalance between the rights and obligations of the parties" is unwritten in a contract of adhesion. In its ruling of 26 January 2022, the Court of Cassation confirmed that this text applies to finance leases, even those entered into by credit institutions.
However, not all imbalances are sanctioned. In the same ruling, the Court held that the absence of reciprocity in a resolutory clause "is justified by the nature of the obligations to which the parties are respectively bound". Similarly, clauses providing for the payment of accrued rent in the event of early termination are generally validated, as the Colmar Court of Appeal recently confirmed on 4 April 2022.
To find out more about the practical implications of these clauses at the end of the contract, read our article on termination of the contract and collective proceedings offers a detailed analysis.
The issue of assignment of contract
There are two economic variants to financial leasing, both of which have a direct impact on the conclusion of the contract.
In the first case, the finance company steps in immediately. The company chooses an asset from a supplier, but the finance company buys it directly and makes it available under a lease contract.
The second scheme involves an assignment of contract. The company initially enters into the lease agreement with the supplier. The supplier then assigns the contract to a finance company. This configuration, which is common in practice, requires particular attention to be paid to the terms and conditions of the assignment.
Article 1216 of the Civil Code, as amended in 2016, provides that a contracting party may assign his status as a party to the contract with the agreement of his co-contracting party. This agreement may be given in advance, in particular in the initial contract. The assignment then takes effect when the other party is notified or when he takes note of it.
Notification is of vital importance. According to the Cour de cassation, in a ruling dated 9 June 2022, the payment of rent into the hands of the assignee may be deemed to constitute acknowledgement of the assignment. However, on 4 November 2021, the Douai Court of Appeal ruled that a simple SEPA mandate form signed in blank was not sufficient to establish notification.
Specific clauses should be included to facilitate this transfer. They must anticipate the tenant's agreement and precisely define the notification procedures, as explained in our general presentation of financial leasing.
Warnings and guarantees
The duty to warn is a particular point of vigilance in financial leasing.
The question arises as to whether the lessor must warn the lessee of the risks of the transaction, particularly as regards the adequacy of the rent to the lessee's financial capacity. Case law is not unanimous on this point. Some decisions recognise the existence of such a duty. In a ruling dated 2 December 2021, the Grenoble Court of Appeal accepted that "the financial lessor, in its capacity as a professional in this type of financing, owes an obligation to warn an uninformed lessee".
Other courts are more reserved. On 15 March 2023, the Riom Court of Appeal refused to recognise such a duty, considering that "the financial leasing mechanism is a simple operation to grasp as a whole". This divergence in case law calls for caution.
The guarantees required by the landlord also deserve attention. A surety bond is often required to secure the payment of rent. Its legal status raises specific issues. The new article 2297 of the Civil Code requires a specific handwritten statement. Similarly, articles 2299 and 2300 concerning the cautioning of the guarantor and the proportionality of the commitment should apply, although case law remains to be confirmed on this point.
To help you secure your finance leases and benefit from tailored advice, our commercial contracts lawyers support you in the pre-contractual analysis and negotiation of essential clauses.
Conclusion
Entering into a finance lease requires particular vigilance. The conditions of validity, the possible application of consumer law, the risk of contractual imbalance, the terms of assignment and the obligations to warn are all points to watch out for.
An in-depth legal analysis is essential before any commitment is made. Our firm can provide you with personalised support to help you secure your finance leases and optimise their drafting according to your specific needs.
Sources
Code civil, articles 1128 et seq., 1171, 1216 to 1216-3, 2297 to 2302 Code de la consommation, articles L. 221-2, L. 221-3 et seq. Code de commerce, article L. 442-1 Cour de cassation, Chambre commerciale, 15 January 2020, no. 18-10.512 Cour de cassation, Chambre commerciale, 26 January 2022, no. 20-16.782 Cour de cassation, Chambre commerciale, 19 April 2023, no. 22-11.097
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