3.3 Management of Capital Invested in Assets 29the legal background rules, the lessor as the owner of the asset typically carries the
risk for the asset, unless the asset has been lost or damaged through the lessee’s
negligence.
Legal background rules. Operating leases are governed by legal background
rules that apply to rental contracts.^24 Those rules may, for example, provide that a
party is free to terminate the contract, unless the parties have agreed otherwise.^25
If the parties agree that the lessee is free to terminate the contract subject to a
defined term and that the lessor is responsible for the maintenance of the leased
assets, the lessor bears the commercial risk inherent in investment in the leased as-
sets.
Service providers. Many firms provide operating leasing services. Operating
leasing services can be provided by manufacturers as a distribution channel for
their products and by rental companies.
Financial Leasing
The finance lease has a fundamentally different purpose to the operating lease.
Whereas the operating lease is a short-term hire of goods, the finance lease is a fi-
nancial tool. Financial leasing is also legally more complicated than operating
leasing.
In financial leasing, the lessor is a financial institution that buys an asset which
it leases to the user. Unlike operating leasing, a financial leasing transaction in-
volves three parties: the seller (a manufacturer or retailer), the buyer/lessor (a fi-
nancial instution) and the lessee (the user of the asset).^26
The lease period is relatively long. The lessor leases the asset to the user for a
substantial proportion of the asset’s life. Often the minimum period of the lease is
approximate to the estimated working life of the equipment. In that case, there will
be only one lessee.
The lessee pays rent. The rent is calculated on the basis that will enable the les-
sor to recoup the capital expenditure of the asset, together with interest. In addi-
tion, responsibility for maintenance of the asset rests with the lessee (and not, as in
the case of operating leasing, with the lessor).
Financial leases are effectively term loans secured on the asset concerned with
capital repayable by instalments. However, while in normal term loans the finan-
cial institution may only obtain a security interest in the asset, in financial leases,
the financial institution is the owner of the asset.
The potential user normally identifies an asset that it wants to acquire and nego-
tiates terms for its purchase. The potential user then seeks a financial institution to
buy it and leases it from the buyer/lessor. Lease payments will need to be suffi-
(^24) See, for example, §§ 535–548 BGB.
(^25) See §§ 542 and 543 BGB.
(^26) Article 1 of the Unidroit Convention on International Financial Leasing contains a defi-
nition of financial leasing.