Supply of Services Flashcards
Rental Agreements
no transfer of ownership
only user ship
2-party transaction
Owner transfers user rights to the tenant
Tenant in return pays rent
From the very first moment, you know that you don’t want to become an owner of a good
From legal perspective - an owner stays the owner, and in case of non-performance he can claim back the physical possession; he only transfers the user ship rights
Rent covers ONLY the monetary value of using that good
Costs in Rental Agreement
Cost for daily use - The tenant has to cover all the daily cost - gas, energy etc.
Extraordinary costs / costs for preservation of building- sink damage, preservation cost - the owner has to pay them - if there smith wrong with the sink the owner is responsible for the fees (if its not due to your daily usage)
Financial Leasing Agreements
3-party transaction
Supplier or Seller of goods-> transfer of ownership to financial institution (lessor) -> usership and possession and option to buy to prospective user (lessee)
Prospective user = lessee
Financial institution = lessor
transaction designed - financial leasing agreement
How is the transaction designed?
The (prospective) user/lessee negotiates with a seller the sale of equipment
Leasing agreement between the user as lessee and a financial institution as lessor
Lessor buys upon instruction of the lessee and becomes owner
Lessor has the strongest security right: the ownership of the leased good
Leveraged Leasing
3-party transaction
Supplier or Seller of goods = lessor & owner
Prospective user = lessee
Financial institution = Funder
Here seller wants to become a lessor - but he isn’t paid at the beginning, he has to obtain funding from a funder, then for the money he manufactures cars and can lease them to the lessee
Seller/Lessor has the strongest position - he is the owner of the good, and he just gives the user ship rights to the lessee, if the lessee does not perform, he takes back the car;
Funder carries a double-party risk - lessor may go bankrupt, or lessee does not pay
between funder and supplier- traditional loan agreement
between supplier of goods and lessee- financial lease agreement
How can funder protect himself
How as a funder can I protect myself - ask mortgages or use an assignment of rights of a lease that lessor gets is assigned to the funder as a collateral + Assignment of rights - technique where we transfer a claim or right to someone else - we don’t change the contract
- if the leaser goes bankrupt money goes directly to funder it has to be send to him otherwise the lessee pays twice
Assigment of rights
Assignment of rights - technique where we transfer a claim or right to someone else - we don’t change the contract
- lessee doesn’t know
How is the transaction designed?- Leveraged Leasing
The (prospective) user/lessee negotiates with a seller the sale of equipment
Leasing agreement between the user as lessee and the supplier as lessor
Lessor itself is (partly) financed by a financial institution
Funding agreement (e.g. investment credit)
Lessor still has the strongest security right: the ownership of the leased good
Lessor (tacitly) assigns the rights to payment against the lessee to the financial institution
Assignment for security reasons
Why tacitly?
Lessee leases for a fixed term. Usually with an option to purchase at the end of the term for the residual value
Sale and Lease-back
2-party transaction
Owner = Seller & lessee
Buyer = lessor
ex.
you are a well established trader in commodities, and you have multiple warehouses, but owe someone money. you find someone that is willing to buy your warehouse and lend it back to you so you get the money liquid to pay the guy that you owe the money and still can use the warehouse cause you lend it from the new owner.
When you use this technique - when you need cash flows
You find someone who wants to buy your property and rent it back to you
What’s the advantage for me? I can stay in my factory and I get the money
What’s the problem? When company’s were in financial distress, they used to use this technique to write off immovable property of their balances, so if the company goes bankrupt, the creditors would not get anything
Design Sale and Lease-back
The Owner sells his good to a certain Buyer
Seller is in need for cash (liquidities / cashflow)
The initial owner / seller leases back the sold good from the buyer
Operational lease
you want to get rid of the costs and maintenance
repair, maintenance - full option package
2-party transaction
Lessee
Lessor = owner of the good
Operational lease
The Lessor leases the good it owns to the Lessee
Lessee leases for a fixed term. Sometimes with an option to purchase at the end of the term for the residual value
The Lessor leases the good it owns to the Lessee
Lessee leases for a fixed term. Sometimes with an option to purchase at the end of the term for the residual value
The lessor carries the entire economic & legal risk- The lessor pays all the maintenance, that’s why he carries economic and legal risk to keep the car in a good condition - in financial lease the lessee carries the economic risk
The lessor will never recover its investment from the lessee
Not even when the lessee lifts the purchase option
The lease = compensation for the use of the leased good
Not used to reconstitute the invested capital
Rental agreement vs operational lease
difference from rental agreement: if parties have no intention to transfer ownership and paying for daily costs is on the lessee side—> rental, if no intention but the owner says he will pay for the daily costs —> operational lease
If you pay extras for tires etc. - operational lease
Purely getting leased object, paying periodically user rights and part of the investment value - financial lease
Option to buy, most cases it is a financial lease agreement - check the contract whether additional services are included
