Property leasing is an attractive option for many companies looking to finance their business premises without tying up cash. This mechanism allows you to acquire a building without a large initial capital outlay. Complex mechanism combining leasing and creditIt is worth exploring its essential aspects.
What is property leasing? Legal definition
Article L. 313-7, 2° of the French Monetary and Financial Code defines property leasing as a transaction whereby a company leases property for professional use, purchased or built on its behalf, where this transaction enables the lessee to become the owner of the property by the end of the lease.
This operation can take three forms:
- By transfer in execution of a unilateral undertaking to sell
- By acquiring ownership of the land
- By automatic transfer of ownership of the buildings
In a ruling dated 10 June 1980, the Court of Cassation stated that "property leasing is a transaction whose purpose is the acquisition of a building by the person who undertakes to make instalments over the term of the contract"..
The hybrid nature of leasing: between a lease and a credit transaction
Leasing has a dual nature that makes it unique.
From a legal point of view, this is a lease. Article L. 313-7 of the French Monetary and Financial Code explicitly refers to it as a "lease". The lessee pays rent and only becomes the owner when the purchase option is exercised.
From an economic point of view, it is a financing transaction. Article L. 313-1 of the same code treats leasing as a credit transaction. Lease payments are similar to loan repayments.
This hybridity has major consequences. For example, case law has established that the status of commercial leases does not apply to property leasing. In eight rulings handed down on 10 June 1980, the Cour de cassation (French Supreme Court) held that"a special legal institution whose main purpose is to acquire ownership of buildings"..
The players in property leasing
Understanding the roles and specific obligations of each party is essential to secure the operation.
The lessor
Since Order no. 2013-544 of 27 June 2013, the lessor must be a finance company authorised by the Autorité de contrôle prudentiel et de résolution (ACPR).
Under article L. 511-5 of the French Monetary and Financial Code, only credit institutions and finance companies are authorised to carry out credit transactions on a regular basis.
An ordinary company can carry out an occasional leasing operation, but is liable to criminal penalties if it does so on a regular basis.
The lessee
The lessee may be any natural or legal person carrying on a professional activity. The property must be used for professional purposes: commercial, craft, liberal or agricultural.
Assets eligible for property leasing
Only buildings for business use may be leased. This concept covers:
- Buildings used for commercial or industrial purposes
- Office buildings
- Professional premises
A building with mixed use (professional and residential) may be eligible if the professional part is predominant.
Buildings may be purchased by the lessor or constructed on its behalf. They may be new or old.
In the specific case of " sale and lease-backIn this case, the company sells its building to a leasing company, which leases it back immediately. This technique makes it possible to recover cash while retaining the use of the asset.
Property leasing vs. other financing methods
Leasing has a number of special features compared with a conventional mortgage:
- The lessee is not the owner during the term of the lease
- Rents are higher than equivalent loan repayments
- Option exercise is not automatic
- Accounting and tax treatment differs significantly
Unlike an operating lease, a financial lease offers the possibility of becoming the owner. Case law punishes the reclassification of contracts: a contract without a purchase option is not a financial lease.
Legal risks to anticipate
Property leasing contracts involve several areas of risk:
Early termination clause
Article L. 313-9 of the French Monetary and Financial Code requires the contract to specify the conditions under which the lessee may request termination, failing which the contract is null and void.
Case law has specified that this option must be genuine. A clause providing for compensation equivalent to the outstanding rent would be unlawful. The Court of Cassation has invalidated many contracts on this ground.
The lessor's exemption clauses
The lessor is generally exempt from its maintenance and warranty obligations. These clauses are valid if:
- They are clear and precise
- The lessee has a mandate to act against the vendor or builder
- The lessor did not play an active role in the technical selection of the asset
A decision of the Mixed Chamber of 23 November 1990 specified that the cancellation of the original sale "necessarily" entails the cancellation of the financial lease.
For such a complex operation, legal advice is recommended. The consequences of poorly drafted contracts can be far-reaching, as evidenced by the abundant case law in this area. Our firm is at your disposal to help you negotiate and draft your contracts. property leasing contractsto secure your investments.
Sources
- Monetary and Financial Code, articles L. 313-7, L. 313-9, L. 511-5, L. 313-1
- Court of Cassation, 3rd Civil Chamber, 10 June 1980, no. 78-11.032 and no. 79-13.330
- Court of Cassation, Mixed Chamber, 23 November 1990, no. 86-19.396, no. 87-17.044 and no. 88-16.883
- Order no. 2013-544 of 27 June 2013 on credit institutions and finance companies
- Court of Cassation, 3rd Civil Chamber, 27 April 1988, no. 84-13.101
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