36 3 Reduction of External Funding Needs
lease-back are used in cross-border leasing. Cross-border leasing is often tax-driven (see
below).
Contracts. A sale and lease-back transaction is basically a transaction between two
parties. It consists of two contracts: a contract for the sale of the asset, and a lease
contract. The ownership of the asset will be transferred to the buyer. The transfer
of ownership protects the buyer against loss. If the transfer of ownership is valid
and enforceable against third parties, the lease resembles a loan secured on the as-
set concerned.^61
Legal aspects. There are several specific legal constraints on sale and lease-
back transactions. The most important of them relate to: (a) what can be sold; (b)
what can be leased; (c) whether the transfer of title mitigates the buyer’s counter-
party risk; (d) the validity and enforceability of essential clauses; and (e) account-
ing rules.
What can be sold? Some assets cannot freely be sold to the financial intermedi-
ary. The sale of some asset classes can require the consent of a third party (for ex-
ample, due to contractual obligations owed to that third party) or the consent of
public authorities (for example, where the ownership or use of those assets re-
quires a government consent). Some rights attaching to certain assets may not be
separated from other rights attaching to the same assets (for example, rights at-
taching to shares may not be separated).
What can be leased back? Some assets cannot be leased back although they
can, in principle, be sold and assigned to the new owner. In particular, it might not
be possible to separate the ownership and use of some rights attaching to the as-
sets. Generally, this often applies to intangible property. For example, voting
rights attaching to shares are exercised by the shareholder that owns the shares
now and may not be leased back to a former shareholder that owned the shares in
the past. In some cases, the lease-back would not be meaningful due to the fact
that important rights attaching to the assets will, by law, be exercised by the owner
of those assets.
Transfer of ownership. There is a risk that the transfer of ownership is not valid
or not enforceable against third parties. The two most important situations where
this might be the case are when the sale is regarded as a mere assignment by way
of security rather than a “true sale” and when a third party’s prior rights will pre-
vail.
“True sale” and recharacterisation. Genuine sale and lease-back transactions
can sometimes be difficult to distinguish from a mere assignment by way of secu-
rity. The parties may sometimes try to evade the operation of mandatory laws that
permit only certain forms of security interests that can be enforced against third
parties (a numerus clausus of security interests).^62
However, the parties typically prefer to mitigate the recharacterisation risk. The
parties try to ensure that third parties will not be able to argue that the transaction
(^61) Ibid, p 242.
(^62) For English law, see Re George Inglefield Ltd [1933] Ch.1, where the question was
whether a sale and repurchase agreement was an unregistered company charge.