32 3 Reduction of External Funding Needs
Ownership of assets after termination. The parties normally agree on what will
happen to the leased asset at the expiry of the contract. The lessee is not interested
in the ownership of the asset during the leasing period, because the lessee will
only pay for the use of the asset. The lessor is typically not interested in the own-
ership of the assets after the expiry of the leasing period.
It is customary to regulate the question of who will be the owner of the asset af-
ter the expiry of the lease term in one of the following four ways:^36 (1) Flexibility.
The lessee may have a right to choose: (a) to return the asset to the lessor; (b) to
extend the lease term; or (c) to purchase the asset at a price that is determined in
the contract. (2) Purchase option. The lessee may have an option to purchase the
asset at a price determined in the contract. However, the lessee will exercise that
option only if the market price of the asset exceeds the agreed price. (3) Sell op-
tion. The lessor may have a right to sell, and the lessee a duty to buy the asset, at
the expiry of the lease term. (4) Profit sharing. The lessee may have a duty to re-
turn the asset to the lessor, who must sell it. If the price is lower than the agreed
residual value, the lessee must pay the difference to the lessor.
In many contracts, the asset is likely to have a low residual value by the end of
the lease. This could make it easy for the lessee to acquire the asset. However,
where the leasing contract provides that the asset will be acquired by the lessee,
the contract may, in some jurisdictions, be regarded as a hire-purchase agreement
in which case the rights and obligations of the parties can change (see below). An
option to renew the lease would not have the same effect.^37
Asset quality: lease contract v purchase contract. One of the causes of legal
concern is responsibility for the quality of the asset. The problem is that the lessee
did not buy the asset from the seller. The lessee selected the seller and determined
the asset’s specifications, but the asset was bought by the lessor.^38 The lessee’s
contract party is the lessor rather than the seller. However, the lessor is only inter-
ested in financing the transaction and prefers not to be responsible for the quality
of the asset in any way.^39 There is therefore tension between the sales contract and
the leasing agreement.^40 – The lessee can manage this problem in two main ways.
First, the lessee may agree on the specifications of the object in the lease
agreement. The lessor, on the other hand, prefers to exclude its responsibility for
the specifications of the object under the lease agreement. This is understandable,
because the lessor typically did not negotiate the specifications of the object with
the seller. Such exclusion clauses are sometimes regarded as unreasonable and un-
enforceable. They can be unreasonable, in particular, in preformulated contract
(^36) Werner HS, Eigenkapital-Finanzierung. Bank-Verlag, Köln (2006) p 194.
(^37) The Law Commission, Registration of Security Interests: Company Charges and Prop-
erty other than Land (A Consultation Paper) [2002] EWLC 164(6) (14 June 2002) para-
graph 6.15.
(^38) See Article 1(2) of the Unidroit Convention on International Financial Leasing.
(^39) See nevertheless DCFR IV.B.–3:102 (conformity with the contract at the start of the
lease period).
(^40) See also DCFR IV.B.–4:104.