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Unit 11: Leasing and Factoring

lease rentals (if any) the lessee has to pay on lease other asset, plus the damages for depriving Notes
him from the of the leased asset from the date of termination of the date expiry of lease term.
Lease of a Leased Asset: The lessee must not do any act, which is not consistent with the terms of
the lease agreement. Lease agreements, generally, expressly exclude the right to sublease the
leased asset. Thus, one should not sub-lease the leased assets, unless the lease agreement expressly
provides.
Effect of sub-lease: The effect of a valid sub-lease is that the sub-lease becomes a lease of the
original lessor as well. The sublease and the original lessor have the same right and obligations
against each other as between any lessee and lessor.
Effect of termination of Main lease: A right to sub-lease restricted to the operation of the main
lease agreement. Thus, termination of the main lease will automatically terminate the sub-
lease. This may create complications for sub-lessee.
So far we have discussed the main provisions related to The Indian Contract Act, 1872. Now let
us discuss the other laws related to leasing.
Motor Vehicles Act

Under this act, the lessor is regarded as dealer and although the legal ownership vests in the
lessor, the lessee is regarded owner as the owner for purposes or registration of the vehicle
under the Act and so on. In case of vehicle financed under lease/hire purchase/hypothecation
agreement, the lessor is treated as financier.

Indian Stamp Act

The Act requires payment of stamp duty on all instruments/ documents creating a right/ liability
in monetary terms. The contracts for equipment leasing are subject to stamp duty, which varies
from state to state.

11.5 Lease Documentation and Agreement

A lease transaction involves a lot of formalities and various documents. The lease agreements
have to be properly documented to formalize the deal between the parties and to bind them.
Documentation is necessary to overcome any sort of confusion in future. It is also legally
required, since it involves payment of stamp duty. Without proper documentation, it will be
very difficult to prove your claim in competent court, in case of any dispute.
The essential requirements of documentation of lease agreements are that the person(s) executing
the document should have the legal capacity to do so; the documents should be in prescribed
format; should be properly stamped, witnessed and the duly executed and stamped documents
should be registered, where necessary with appropriate authority.
Clauses in Lease Agreement: There is no standard lease agreement, the contents differ from case
to case. Yet a typical lease agreement shall contain following clauses:

 Nature of lease: This clause specifies whether the lease is an operating lease, a financial
lease or a leveraged lease. It also specifies that the lessor agrees to lease the equipment to
the lessee and the lessee agrees to take on lease from the lessor subject to terms of the lease
agreement, the leased asset.
 Description: The clause specifies the detailed description of equipment, its actual condition,
size, components, estimated useful life, and so on.
 Delivery and Re-Delivery: The clause specifies when and how the equipment would be
delivered to the lessee and re-delivered to the lessor R or expiry of the lease contract.

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