Finance Leasing: An Introduction

by Tom Budgett, Clifford Chance in Paris

Part Two of this series examines the differences between leases and loans.

Comparison for Fiscal Purposes of Finance Leases and Loans

A further comparison may be made between equipment finance agreements (whether lease, hire purchase or conditional sale agreements) on the one hand, and loans on the other, since finance leases, hire purchase and conditional sale agreements may well have financial consequences for both parties to the transaction similar to those of the loan.

The legal distinction between loan financing and lease financing or hire purchase is fundamental – in the case of the former, the equipment will be acquired by and beneficially owned throughout by the user/borrower and the rights of the lender to repayment of principal and to interest in the meanwhile, even if those rights are secured by a fixed charge over the equipment, remain the rights of a mortgagee only, which give certain rights limited by law over the equipment in the event of default, but which rights in themselves do not amount to “ownership”. In the case of a lease, however, the financing institution as lessor remains throughout the beneficial owner of the equipment, notwithstanding the user/lessee has the right to actual possession, enjoyment and use to an extent more usually associated with ownership.

This is only an excerpt of Finance Leasing: An Introduction

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