This second part of the series of legal briefs which highlight the legal framework of Ethiopia vis-à-vis capital goods leasing business and its salient features, will deal with the types of leasing agreement, their general and specific features, the rights and duties of the lessor and the lessee.  

 

Definition, Types and Features of Leasing Agreements 

 

The Leasing Proclamation authorizes the lessor and the lessee to govern their relationship using a legally binding and mutually agreed leasing agreement. The law begins by defining what is meant by "leasing" and provides for the three types of leasing agreements with their general and specific features. 

 

Under Article 2(1) of the Leasing Proclamation, leasing is defined as "a financing in kind for production and service purpose by which a lessor provides lessee with the use of specified capital goods on financial or operating or hire purchase agreement basis without requirement of collateral, for a specified period of time and collects in turn a certain amount of installment in periodical payments over the specified period." 

 

From this definition it can be understood that the Ethiopian law gives recognition to the three widely known types of leasing agreements; namely financial leasing, operating leasing and hire purchase leasing. MoTI is empowered and obliged to register all three types of lease agreements and their amendments, modifications and termination (Article 18(2) of the Leasing Proclamation). 

 

The Leasing Proclamation (Article 5), states the mandatory features that all three types of leasing agreements are required to contain. The agreements should, inter alia, contain a statement as to the type of leasing, description of the capital goods, amount of rent and the manner of payment, and the rights and duties of the lessee and the lessor. In addition to these general features, each type of leasing is required to fulfill the specific features provided by the Leasing Proclamation. These are: 

 

Financial leasing (as defined under Article 2(3) of the Leasing Proclamation), is a type of leasing by which the lessor provides the lessee, against payment of mutually agreed installments over a specified period, with the use of specified capital goods which are either already acquired by the lessor or are purchased by the lessor from a third party known as "the supplier", chosen and specified by the lessee and under which the lessor shall retain full ownership right on the capital goods during the lease agreement. 

 

However, the two parties can agree that the lessee may have an option to purchase or return the capital goods after the termination of the lease period. The financial leasing agreement is required to be full pay-out and non-cancelable, i.e. a lease agreement that is cancelable only by the operation of the law or mutual agreement of the parties (Articles 6(1) (b) cum 2(11) of the Leasing Proclamation). 

 

Hire purchase leasing (defined under Article 2(4) of the Leasing Proclamation), is a type of leasing by which a lessor provides a lessee with the use of specified capital goods, against payment of mutually agreed installments over a specified period under which, with each lease payment, an equal percentage of the ownership is transferred to the lessee and upon effecting of the last payment, the ownership of the capital goods shall automatically be transferred to the lessee. The parties are required to provide in the agreement for the manner of transfer of ownership in case of early termination of the lease agreement (Article 6(3) of the Leasing Proclamation). 

 

Operating leasing (defined under Article 2(5) of the Leasing Proclamation), is a type of leasing for a period of time not exceeding 2 (two) years, by which the lessor provides the lessee against payment of mutually agreed rent with the use of specified capital goods that the lessor has at hand. Unless there is an agreement between the two parties to renew the contract or the leased capital goods are to be purchased by the lessee, the lessor remains the owner of the leased goods (Article 6(2) of the Leasing Proclamation). 

 

Financial lease and hire purchase are categorized as capital goods finance and hence operating lease is excluded (Article 2(14) of the Leasing Proclamation). As stated in Part I of this legal brief, the license to engage in the capital goods finance business is to be issued by NBE while the license to engage in operating lease business is to be undertaken by taking license from NBE.      

 

Rights and Responsibilities of the Lessor  

 

The law takes for granted that the lessor has all rights of ownership on the capital goods. The ownership right of the lessor remains intact even though the lessee is judicially bankrupt (Article 9(2) of the Leasing Proclamation). Due to these assertions, the law gives all the rights and duties that an owner of a property is, respectively, entitled and obliged to observe. An owner of a given property is entitled to enjoy three interrelated rights of use, abuse and collecting the fruits of such property. Accordingly, the lessor is entitled to the following major rights and duties, short of using the capital good s/he has rented to the lessee. These are: -

 

Transfer of right-the lessor is entitled a unilateral right to assign his rights and the lease agreement to third parties, but without the infringement of the lessee’s right to the quiet enjoyment of the capital goods leased (Article 11 of the Leasing Proclamation).

 

Right to defend suits brought by third parties-as an owner of the leased capital goods, the lessor, is entitled to defend actions brought by third parties claiming rights on the goods. The ownership right of the lessor over the capital goods leased prevails at all times over claims by third parties, including creditors of the lessee (Article 12(1) cum 12(2) of the Leasing Proclamation).

 

Right to repossess the leased good-where the lessee rescinds the lease agreement or after the expiry of the agreement or in a case where the lessee failed to discharge his/her obligation as stated in the agreement and the law, the lessor is entitled to repossess the leased good after giving the due notice to the lessee. Furthermore, the lessor is also entitled to claim damages (Article 10(1) cum 10(3) of the Leasing Proclamation).   

 

Right to terminate the contract-the lessor can rescind the lease agreement with prior notice and repossess the leased goods, where the lessee does not make use of the capital goods in accordance with the lease agreement or accepted norm or usage, and such use entails risk of irreparable damage to the capital goods leased (Article 8(4) of the Leasing Proclamation).    

 

Duty to pay taxes and encumbrances-the lessor is obliged to bear taxes claimed on the leased goods and to settle any encumbrances s/he has created on the leased goods (Article 14(3) of the Leasing Proclamation).

 

Duty to inform the lessee about defects on the goods-the lessor is legally obliged to inform the lessee about defects of the capital goods, where the lessor knew or should have known of the defect when delivering the goods.  If the lessor does so, he is not obliged to warrant such defects. If the lessor fails to do this, s/he is obliged to make good the damage the lessee has suffered due to the failure of the lessor to inform the lessee about the defect (Article 8(1) cum 8(2) of the Leasing Proclamation). However, the lessor is not liable for defects in and for unfitness for intended use of the capital goods he purchases in conformity with the specifications given by the lessee (Article 8(3) of the Leasing Proclamation). 

 

Rights and Responsibilities of the Lessee 

 

The Leasing Proclamation defines the lessee as "a person who, under a lease agreement, obtains capital goods in return for rent for an agreed period of time" (Article 2(6) of the Leasing Proclamation). The rights and responsibilities of the lessee are principally to be determined by the lease agreement to be concluded between the lessor and the lessee. But the Leasing Proclamation has provided for the following major rights and duties that the lessee is, respectively, entitled to exercise and obliged to observe. These are: -        

 

Right to enjoy quiet possession-the Leasing Proclamation stresses that the lessee is entitled to enjoy quiet possession without any interference either from the lessor or from third parties, during the tenure of the lease agreement. This right continues with the organ legally subrogated to a judicially bankrupt lessor as long as the lessee performs his obligations in accordance with the terms of the lease agreement (Article 9(1) of the Leasing Proclamation).

 

To enjoy rights emanating from sales contract-the lessee is entitled to enjoy rights emanating from a sales contract between the lessor and the supplier of the capital goods (Article 5(6) of the Leasing Proclamation).

 

The right to terminate the agreement in case of defective goods­-the lessor is obliged to inform the lessee about defects of the leased capital goods, which diminish their usefulness to the lessee; if not the lessee can terminate the agreement and return the leased goods to the lessor (Article 5(5) of the Leasing Proclamation).

 

Right to demand reduced rent-where the value of the capital goods has decreased as a result of legal proceedings instituted by third parties against the lessor, the lessee has the right to demand the reduction of rent according to the new value or require the cancellation of the agreement (Article 12(5) of the Leasing Proclamation).

 

Duty of proper maintenance and insuring the goods-in all of the three types of lease agreements, the lessee is obliged to take care of and preserve the capital goods as long as it is in his/her custody. The lessee is obliged to repair damages caused to the capital goods during the time the agreement is in force (Articles 5 (4), 6 cum 15 of the Leasing Proclamation).

 

Duty towards third parties during the tenure of the agreement-the lessor is not responsible for death, personal injury or damage to property of third parties during the use of capital goods by the lessee (Article 5(8) of the Leasing Proclamation). Hence, the lessee is liable towards third parties for such damage and harm, where the liability is sustained during the tenure of the agreement.     

 

Refraining from creating encumbrance-the lessee cannot create any charge or encumbrance on capital goods leased. In cases where any charge or encumbrance is created by the lessee on the capital goods, it shall be null and void. This is so because the law has granted all the rights emanating from ownership of property, except use right, to the lessor (Articles 6 cum 14 of the Leasing Proclamation).        

 

Duty to inform the lessor-the lessee is obliged to inform the lessor of any impediments or disturbances by third parties to his/her quiet enjoyment of the capital goods. Failure or delays in doing this make the lessee responsible for any expenses or damages incurred by the lessor (Articles 12(3) and 12(4) of the Leasing Proclamation).   

End of Part II

Posted on May 10^th 2020