A finance lease transaction consists of a lease contract between a lessor and a lessee, and the corresponding sale and purchase contract between the lessor (buyer of the leased equipment) and a supplier (seller). The two contracts are individual ones, but their provisions are closely related. (Refer to 'Guidance/Characteristics of Finance Lease')
Japan Leasing Association (JLA) issues a model for a leasing contract between a lessor and a lessee, that of order form and that of order-acknowledgement form which is a sale and purchase contract between a lessor and a supplier, and a model of a certificate for leased equipment that a lessee issues to a lessor.
- The model of lease contract is composed of 28 clauses and the appendix that lists contractual conditions.
- The model of order form is a document by which a lessor makes an order to purchase from a supplier leased equipment in accordance with the lease contract. A lessor issues an order form to a supplier, who in turn issues an order-acknowledgement form to the lessor. Details of leased equipment (model, specification, quantity, and others), the date for the equipment to be installed, the place for the equipment to be delivered in, and the like are listed in the order form and the order-acknowledgement form. The provisions (conditions of sale and purchase) of the order form and those of the order-acknowledgement form are the same. Both of the forms consist of 11 clauses.
- The certificate for leased equipment is a document by which a lessee declares its intention to lease the equipment after the lessee has inspected it. On the day written in the certificate, the delivery of the leased property from a lessor to lessee has been completed and the lease contract commences.
Primary clauses (L#) of a lease contract and those (S #) of the corresponding order form and order-acknowledgement form are as follows:
A lessor purchases the equipment designated by a lessee from the seller designated by the lessee, and then leases it to the lessee. The lessee uses it. The contract is non-cancelable.
The equipment included in the corresponding sale and purchase contract is the one designated by the lessee in the lease contract.
The seller delivers the equipment to the lessee. After inspecting it and confirming there being no defect, the lessee issues to the lessor a certificate for that leased equipment with the commencement date written, and the delivery of the equipment from a lessor to a lessee is regarded as being completed on that date.
The seller (rather than the lessor) directly delivers the equipment to the lessee. On the date in the certificate, the lessor is regarded as having completed its obligation to deliver the equipment to the lessee.
L3, 4, and 5
The lessee is allowed to use the equipment from the date written in the certificate. The lease term starts from the commencement date written in the certificate based on the appendix. The lessee must make lease payments as the appendix stipulates.
L7 and 8
The lessee puts a label indicating that the equipment belongs to the lessor, avoiding the lessor's right being violated.
The ownership of and risk of loss arising from the equipment are transferred from the seller to the buyer (the lessor) by the delivery of the equipment.
The lessee is responsible for maintaining and repairing the equipment. When it is damaged, the lessee incurs the cost for the recovery.
The seller is responsible for maintaining and repairing the equipment.
The lessor insures the equipment. If the lessee repairs the equipment in accordance with the clause 3, the cost the lessee incurs is mitigated as long as the insurance covers.
If it is impossible for the damaged equipment to be repaired, the liability to pay lease payments (clause 17) is mitigated for insurance amount.
The lessor does not need to take any warranty against defects. The lessee directly makes a claim against the seller for the defects. The lessor proceeds in assigning to the lessee the buyer's right against the seller. In this case, the lessee still must make lease payments to the lessor.
The seller takes any responsibility for defects related to the leased equipment, and is not allowed to make an objection against the buyer (the lessor) for having assigned the buyer's right to the lessee.
|Risk of Loss||
The lessee takes any risk of loss that is attributive to neither the lessor nor the lessee throughout the lease term, which is from delivery of the equipment to its return. When the equipment is damaged and unrecoverable, the lessee must pay compensation to the lessor and then the contract is terminated. (Refer to L14.)
When the lessee fails to pay lease payments, violates provisions of the contract, or has fallen into credit impairment or bankruptcy, the lessor is allowed to terminate the contract and to require the lessee to return the equipment and to pay the outstanding lease payments.
It is possible to renew the lease contract on the same equipment as long as the parties agree before the lease term expires. (There are two methods: One is to sign a new lease contract; the other is to renew the original contract for another year based on the conditions in the appendix of the contract.)
When the contract is terminated by the expiry of the lease term or prematurely terminated, the lessee is responsible for returning the equipment to the place designated by the lessor. If the equipment is returned and the lessee pays the outstanding lease payments in the middle of the lease term in accordance with the clause 19, the difference between the estimated residual value and that of equipment at the termination should be settled down.