The Finance Lease - Unit 11

Comprehensive flashcards covering the nature, characteristics, and legal relationships of finance leases based on Unit 11 lecture notes.

What is the essential characteristic of a lease of goods in English Law?

It is a hire contract where goods are bailed by one party to another for their use or enjoyment in exchange for payment of rent.

How is a finance lease defined for accounting purposes?

A lease that transfers substantially all the risks and rewards of ownership of an asset to the Lessee.

How does a finance lease differ from a hire-purchase contract regarding the end of the agreement?

In a finance lease, the lessee has neither the option nor the obligation to purchase the goods but must return them when the bailment ends.

What is an operating lease?

A lease under which equipment is let out to a series of different lessees in sequence, with each paying rent reflecting its use-value.

In a finance lease, what is the typical duration of the minimum period of the lease?

It approximates to the estimated working life of the equipment, so there is typically only one lessee.

How are rentals calculated in a finance lease?

They are calculated on the basis of recouping the lessor's capital expenditure and giving him the desired return on capital, rather than on the use-value of the equipment.

What is the usual practice regarding the residual value of equipment at the end of a finance lease?

The lessor typically returns the greater part of the sale proceeds to the lessee by paying him or crediting him against a future transaction.

What would happen if a lessee was given the ability to acquire the equipment himself at the end of the lease?

The transaction would be converted into a hire purchase agreement.

What responsibilities does the lessee have regarding the asset in a finance lease?

The lessee has an obligation to maintain the equipment, pay rentals, and return the asset at their own cost at the end or termination of the lease.

What is the legal relationship between the lessor and the supplier?

The relationship is that of seller and buyer.

What is the implication if a lessor authorizes a lessee to purchase equipment as an agent from a supplier?

The supplier may treat the lessee as the purchaser, or if the lessor is discovered as an undisclosed principal, the lessor can be held liable on that contract.

Why does a lessor run little risk of losing title if a lessee wrongfully disposes of the equipment to a third party?

None of the statutory exceptions to the nemo dat rule are applicable in this situation.