True lease is a kind of long-term lease, in which exclusive rights to use and own a property or equipment is granted by the lessor to the lessee for a (monthly) fee for the time specified in the contract. True lease is similar to the rental from the point of view of the landlord.
True lease includes a rental contract for a definite period (less than a year), which is automatically renewable and also an indefinite term lease.
If there is a situation of non-compliance with the rental agreement, it cannot be supposed that the trustee will fail to fulfill his obligations. The borrower compensates the lessor for financial loss and ensures certainty of future leasing results. The party who is not the debtor may not have secured protection against the bankruptcy estate, so the cancellation of the lease that has not yet expired is a breach of the contract.
- Tax/Accounting realization event – No
- Tax/Accounting depreciation allowance – Lessor
- Tax/Accounting payments – Income to Lessor and deduction to Lessee
- Rights of Creditors of lessee – cannot get goods, may be able to attach rights to lessee's holding interests
- Lessor has to file a financing statement to protect its dealings - No
In determining whether an agreement is a true lease follow these tips:
- nature of the business
- intention of the parties
- benefits and disadvantages of ownership
- option to purchase
- transfer of ownership
- security interest
- effect of the transaction
Benefits of true lease
Payments of true loans are typically lower than they are for a standard loan, and flexible payments are available, as well. For example, monthly adjustments may be made if entity can afford to pay a little more or a little less each month. The entire cost of the equipment can be financed, which means very little cash is needed up front. Leasing of needed equipment frees up funds for other business expenses, which causes no need of buying an equipment.
Examples of True lease
- True Lease of a Real Estate Property: A true lease of a real estate property gives the lessee exclusive rights to use and own the property for a certain period of time. The lessor collects rent from the lessee for the duration of the lease. The lessee is responsible for all taxes, insurance, and maintenance of the property. At the end of the lease term, the lessee has no right to purchase the property and the lessor may choose to renew the contract or negotiate a new lease.
- True Lease of a Vehicle: In a true lease of a vehicle, the lessee is granted exclusive rights to use and own the vehicle for a certain period of time. The lessee pays a monthly lease fee to the lessor, which includes taxes and insurance. At the end of the lease period, the lessee must return the vehicle to the lessor and has no right to purchase it.
- True Lease of Equipment: In a true lease of equipment, the lessee is granted exclusive rights to use and own the equipment for a certain period of time. The lessee pays a monthly lease fee to the lessor, which includes taxes and insurance. At the end of the lease period, the lessee must return the equipment to the lessor and has no right to purchase it.
Limitations of True lease
- True leases can be highly inflexible, as the terms are agreed upon in the contract and cannot be easily amended.
- The lessee cannot make any physical modifications or changes to the property or the equipment without the permission of the lessor.
- The regular payments of the lessee must be kept up-to-date in order to remain in good standing.
- The lessee is responsible for any damage or wear on the property or equipment, and may be liable for any repairs or replacements that may be necessary.
- The lessor retains ownership of the property or equipment and is entitled to it upon the end of the lease.
- The lessee may not have the option to purchase the property or equipment at the end of the lease.
Other approaches related to True lease include:
- Sale and Lease Back - this is a type of financing involving the sale of an asset to a third party, and then leasing it back from them on a long-term basis.
- Operating Lease - this provides the lessee with access to an asset for a specified period of time without the lessee taking on ownership of the asset.
- Lease Purchase - this is a hybrid of a lease and a loan, where the lessee is required to make regular payments (usually monthly) throughout the length of the agreement, and then a final balloon payment at the end.
In summary, there are many approaches related to True lease, including Sale and Lease Back, Operating Lease, and Lease Purchase. Each of these approaches has its own specific features and benefits, and it is important to understand them to determine the best option for one's situation.
- (Shilling D. (2016), p. 23)
- (Shilling D. (2012), p. 20)
- (Shilling D. (2012), p. 20)
- (Sepinuck S. L. (2008) p. 84)
- (Herbst A. F. (2003), p. 131)
- (Duncan R. F. (2013), p. 27)
- Duncan R. F. and others (2013),The Law and Practice of Secured Transactions: Working With Article 9, Law Journal Press, p. 27
- Herbst A. F. (2003), Capital Asset Investment: Strategy, Tactics and Tools, John Wiley & Sons, p. 131
- Shilling D. (2012), Lawyers Desk Book - 2013 Edition, Aspen Publishers Online, p. 20
- Shilling D. (2016), Lawyer's Desk Book - 2017 Edition, Wolters Kluwer Law & Business, p. 23
- Sepinuck S. L. (2008), Practice Under Article 9 of the Uniform Commercial Code, American Bar Association, p. 84
Author: Monika Sojka