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LEGAL ASPECTS OF LEASING IN ENGLAND By Alistair MacRae, Partner, Norton Rose
This article was prepared in October 2003 by Norton Rose, the international law firm and a market leader in the areas of structured and asset finance. For further information on Norton Rose, please click www.nortonrose.com or alternatively contact Alistair MacRae (Partner) in their London office (+44 207 283 6000) Disclaimer: this publication is intended only to give guidance rather than definitive advice. Norton Rose accepts no liability for any errors or omissions in the information herein and accepts no responsibility for anyone who takes action and/or relies on any information that has been provided. Copyright: this publication is copyright © Norton Rose 2003. All rights reserved. Extracts may be copied provided their source is acknowledged.
1 Relevant Provisions of English Law (common law and statute) The main provisions are as follows:
There is no requirement in common law that a lease of movable assets should be in writing or in any particular form. An oral contract is valid and enforceable. The Consumer Credit Act 1974 however lays down rules on form and content that must be observed in relation to regulated agreements. If the lessee is a company incorporated in the UK, it must have power to enter into the transaction in question and the execution of the documentation required to effect the transaction must be duly authorised. Although the Companies Act 1985 (as amended) contains provisions which are intended to afford protection in this regard to persons dealing with a company, the protection is not absolute and we recommend that lessors should, as a precaution, examine the Memorandum and Articles of Association of the lessee and satisfy themselves that the execution of the transaction documentation has been properly authorised. Particular queries have arisen in relation to the validity of leasing and other financial arrangements with local authorities. This is a complex subject on which careful advice is required, but it is clear that, in the right circumstances, a local authority may obtain the use of assets to fulfil its statutory functions by way of lease just as it may purchase them outright. Similar considerations apply when dealing with certain other governmental and public sector bodies. A lease may be illegal either because it is prohibited by law or because the assets are to be used for an illegal purpose, for example a lease of assets to be used for illegal gaming. Such a lease would be unenforceable. In addition, particular clauses in lease documents may be held to be unenforceable, for example a termination payment which is excessive and therefore in the nature of a penalty rather than genuine compensation to the lessor for the loss of rental receipts. 1.3 Liability to third parties The question of liability between lessor and lessee for damage caused to each other will be primarily a matter of contract and governed by the terms of the lease. Under English law, a lessor may also be liable in tort to third parties for injury or damage which they may suffer in connection with the use, operation or condition of the assets if the lessor is in breach of a duty of care towards such third parties. There is no comprehensive guide to the type of situations where such a duty of care will be recognised. Broadly speaking, the lessor will risk incurring liability where the loss or damage caused to the third party was reasonably foreseeable and the lessor failed to take reasonable precautions (such as quality control and safety checks on the assets) to prevent the occurrence of the damage. As a protective measure, a lessor will normally require the lessee to operate and use the assets in a safe way and maintain them in a safe condition, and to effect insurance against third-party claims. The lease will normally state that the lessor has no liability to the lessee for the state or condition of the assets, and that the lessee will be required to indemnify the lessor against third-party claims arising both during the lease period and after the lease expires. The enforceability of the indemnity and the exclusion of liability provisions is subject to the provisions of the Unfair Contract Terms Act 1977 (see below). Traditionally, relief from forfeiture has always been available in relation to leases of land. It originated in the Court of Chancery and was later developed by statutes to protect the lessee from forfeiture in cases where he had acquired a proprietary interest in the land and where it would have been unjust to allow the lessor to obtain both the rentals and the property. In relation to leases of moveable assets (“chattels”), however, the circumstances in which relief could be granted were, until recently, not very clear. One of the arguments often used by lessors against lessee’s claiming relief from forfeiture was that, whilst in a lease of land the lessee often acquired a proprietary interest, in a lease of chattel, the lessee’s interest could only be contractual and thus the lessee should not be entitled to forfeiture. The recent case of On Demand Information plc & anr v Michael Gerson (Finance) plc & anr (Court of Appeal July 31, 2000) clarifies the position by stating that rights in chattels could be possessory so long as the provision occasioning forfeiture amounted to security for the payment of money or obtaining a specific result. In this case, the court held that relief was no longer possible as the chattel had been sold and could no longer be returned in the same form. In addition to the circumstances set out by the Court of Appeal in the case of On Demand Information, it seems that relief will only be granted if no prejudice is caused to the lessor’s position and where there is danger of injustice to the lessee (likely to be where forfeiture is sought after the end of the primary less period). 1.5 Unfair Contract Terms Act 1977 (“UCTA”)
Under UCTA, a lessor cannot exclude or restrict liability for death or personal injury to any person (including the lessee) resulting from the lessor’s negligence. In the case of other loss or damage, a lessor cannot exclude or restrict his liability for negligence except to the extent that the relevant term satisfies the requirement of reasonableness. UCTA also contains a general provision that, where one party deals on the other’s written standard terms of business, the other may only restrict, exclude or seek to avoid liability to the extent that the clause in question satisfies the requirement of reasonableness. UCTA contains an even more stringent regime in the case of transactions involving consumers. Broadly, a party to a contract deals as a consumer when, outside the course of a business, he makes a contract in respect of goods of a type ordinarily supplied for private use or consumption. The Courts have yet to determine fully how the text of reasonableness will apply to exclusions in leases but UCTA gives some guidance in respect of certain (but not all) types of exclusions. It states that the term should be a fair and reasonable one to be included having regard to the circumstances which were or ought reasonably to have been in the contemplation of the parties when the contract was made and in particular: If the lessor seeks to put a monetary limit on its liability, UCTA provides that regard must be had to the resources which could be expected to be available to it to meet the liability, and how far it could cover its risks by insurance. Lessors should also be aware of the Unfair Terms in Consumer Contracts Regulations 1994 (the “Regulations”) which are intended to operate in parallel with UCTA. The Regulations apply to contracts with individual consumers which have not been “individually negotiated” (in other words, standard form contracts). Unlike UCTA, which applies principally to exclusion clauses, the Regulations apply to all clauses except those which relate to the core subject matter of the contract and price (provided these are in plain, intelligible language). The Regulations use the concept of unfairness, and give guidance on what may constitute an “unfair term”. An unfair term is not binding on a consumer. 1.6 Supply of Goods and Services Act 1982
This Act provides that in a contract for the hire of assets (which includes an equipment lease) a number of terms are implied. The most important of these are as follows: Similar provisions appear in the Supply of Goods (Implied Terms) Act 1973 in relation to hire purchase contracts. 1.7 The Sale of Goods Act 1979 (as amended)
When a lease expires it may be that instead of being leased to another lessee the asset will be sold, sometimes by the lessee acting as agent of the lessor. The Sale of Goods Act implies certain conditions with regard to the sale of goods and the definition of goods in the Act will cover most assets which are subject to leasing arrangements. The terms implied by the Sale of Goods Act are very similar to the terms implied by the Supply of Goods and Services Act and are that: Again, UCTA prescribes the extent to which liability for breach of these terms may be excluded or restricted. 1.8 The Consumer Credit Act 1974 (“CCA”) The objective of the CCA and regulations made thereunder is to regulate all aspects of the supply of credit or the supply of goods on hire to “consumers”. The CCA’s definition of “consumer” does not however limit itself to persons acting otherwise than in the course of business(which would have been logical) but includes individual, institutions and partnerships, i.e. any lessee that is not a corporation. A leasing agreement with such a “consumer” will normally fall within the definition of a “consumer hire agreement” and if the amount, or the amount of payments, due under the agreement is £25,000 or less and it is capable of subsisting for more than three months, it will constitute a “regulated agreement”. The CCA lays down rules on practically every aspect of “regulated agreements”, including advertising, canvassing, form and content, signature, the service of copy agreements, cancellation, termination, enforcement and default procedures. The CCA also introduced a system of licensing which must be complied with by any person seeking to participate in consumer credit or consumer hire business. The sanctions for non-compliance with the CCA include unenforceability of contracts and revocation of licence. The provisions of the CCA are now of such length and complexity that extensive reform is being considered. 1.9 The Human Rights Act 1998 (the “Act”) The Act directly incorporates the European Convention on Human Rights (the “Convention”) into UK domestic law. The Act imposes obligations on companies’ activities in a wide range of areas including employment practices and it also secures the rights of companies from misuse of state and public authority power directly from any court or tribunal in the UK. The English courts have been ready to exercise their power under the Act to declare statutes incompatible with the Convention and have also used the Act to strengthen particular rights, such as privacy and fair trail and also planning, financial services regulation and consumer credit. The case of Wilson v. First County Trust Ltd (No. 1) November 23, 2000 and (No. 2) May 2, 2001 is an example of the Act’s applicable to consumer credit law. The case centred on whether CAA restrictions on the enforcement of a consumer credit agreement infringed First County’s human right to have the enforceability of its loan determined by the Court. The Court of Appeal held that the effect of section 65(1) and section 127(3) of the CCA was to deprive First County of its ability to enjoy the benefit of the contractual rights arising from the agreement. The provisions of section 127(3) were not legitimate because the inflexible prohibition on enforcement infringed First County’s rights to an extent which was disproportionate to policy aims under the Act.
Since the passing of the Insolvency Act 1986 there has been a growing tendency for insolvent companies to apply for an Administration Order as an alternative to the appointment of a liquidator. Administration (in some ways similar to a Chapter 11 procedure in the US) was foreseen as being suitable for companies which were insolvent or likely to become insolvent, but where a breathing space against hostile actions of creditors might allow the survival of the company or a settlement with its creditors or a better realisation of assets than in a liquidation. The Insolvency Act 1986 provides that an application may be made to the Court, either by a company or by its directors or by any of its creditors, for the appointment of an administrator (who must be a licensed insolvency practitioner) to manage the affairs and business of the company. The Insolvency Act 1986 gives an administrator wide powers, and in particular provides that, during the period of an administration order, creditors may not, except with the consent of the administrator or (failing such consent) the approval of the Court: The detailed provisions of the Insolvency Act 1986 (and their application by the Courts in cases such as Re: Atlantic Computer Systems plc (In Administration) [1992] CH 505) raise a number of important issues for lessors where the lessee becomes the subject of an administrator order. The corporate insolvency provisions of the Enterprise Act 2002 amended certain parts of the Insolvency Act 1986. Although the powers of an administrator remain substantially the same, the circumstances in which an administrator can be appointed have changed. It is now possible for a creditor, as well as the company, to appoint an administrator. This may be done by petition to the court (as before) or by using a new out-of-court procedure. Since 15 September 2003, the availability of administrative receivership has been restricted to certain types of transaction, such as project financings or capital markets transactions, which fall within the exceptions set out in the legislation. The Insolvency Act 2000 covers a wide range of new areas including the introduction into the company voluntary arrangement (CVA) procedure of an optional moratorium for small companies to allow them to put to their creditors proposals for a CVA. The UK government’s proposals are intended to encourage a “rescue culture” in which companies in financial difficulties can have their fortunes reversed, with protection from individual creditors actions where necessary. The emphasis is on CVAs and administrations as collective rescue procedures rather than on administrative receiverships and receiverships which are designed primarily to protect the interests of secured creditors. The main provisions of the Insolvency Act 2000 are: In recent years we have seen a trend towards transferring the responsibility for performing certain public services (such as waste disposal, water supply and education) away from centralised public authorities to newly created special-purpose companies or bodies, usually in the private sector. Such transfers are generally effected by legislation, and statutory provision is made for the automatic transfer (or “vesting”) to the new company of all of the assets owned by or leased to or otherwise used by the public authority in performing the service (together with the related liabilities). It is generally the case that third parties, such as lessors, who have entered into contracts with a public authority in respect of assets which are to be the subject of a Vesting Order will have few, if any, rights to object to the transfer of such contracts. A degree of protection may be afforded if (as is often the case) the legislation requires the new company to be adequately funded so as to enable it to meet its future contractual obligations. Nevertheless, when contracting with public authorities and other similar bodies, lessors need to consider the likelihood of a possible future divestment of business or privatisation involving the transfer of the obligations of the lessee to a new company whose creditworthiness may be less satisfactory. The borrowing and spending powers of many public bodies (such as local authorities) are subject to certain statutory or governmental controls. Leasing transactions may, where the lessee is a public body, fall within the scope of these controls may be treated as being ultra vires (i.e. as being beyond the power of the relevant body) and accordingly may be void. In such circumstances the lessor may be unable to enforce its rights to receive rentals or other such payments. 1.13 The Money Laundering Regulations 1993 and 2001 (the “Regulations”): Regulations apply to all businesses which are relevant financial businesses within the meaning of the 1993 Regulations. Such businesses must establish and maintain specific policies and procedures to guard against being used for the purpose of money laundering. In essence, these procedures are designed to achieve two purposes: firstly, to enable suspicious transactions to be recognised as such and reported to the authorities; and secondly, to ensure that if a customer comes under investigation in the future, a financial institution can provide its part of the audit trail. The Regulations cover internal controls and communication, identification procedures, recognition of suspicious transactions, reporting procedures, education and training of employees and record keeping. As part of its objective of fighting financial crime, the FSA has been given explicit powers in relation to regulating money laundering under FSMA. The FSA has developed money laundering rules which operate parallel to, but separately from, the Regulations. In addition, the FSA has the power to prosecute for breaches of the Regulations. The Regulations are expected to be replaced by the Money Laundering Regulations 2003 early in 2004. 1.14 Health and Safety at Work etc. Act 1974 (“HSWA”)
HSWA imposes obligations on supplies of assets for use at work (which are deemed to include lessors) to ensure that the assets in question are safe and without risk when properly used. However, the Health and Safety (Leasing Arrangements) Regulations 1992 exempt certain categories of lessors from the statutory duty to comply with the terms of HSWA, categorising them as “ostensible” rather than “effective” suppliers. Finance lessors will be “ostensible lessors” and so exempted provided they satisfy the following conditions: 1.15 The Occupiers’ Liability Act 1957 This Act imposes a duty of care on occupiers of premises towards all visitors except insofar as this is modified by agreement. It may be relevant to lessors because the definition of “premises” includes ships, vehicles or aircraft. The duty of care requires the occupier to take such care as in all the circumstances is reasonable to see that a visitor will be reasonably safe in using the premises for the purpose for which he is permitted by the occupier to be there. “Occupier” is a person who has a sufficient degree of control over the premises to put him under a duty of care towards such visitors. In most leasing transactions the occupier will almost certainly be the lessee, but the various obligations and indemnities referred to under paragraph 4 above (liability to third parties) are as a precaution usually expressed so as to extend to matters arising under this Act. 1.16 Consumer Protection Act 1987 (“CPA”) - product liability.
The product liability provisions of the CPA came into force on March 1, 1988 to implement the European Community (“EC”) Directive of July 25, 1985. Article 81(1) (formerly Article 85(1)) of the EEC Treaty prohibits as incompatible with the common market all agreements, decisions and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market. In particular, Article 81(1) can apply in respect of price-fixing agreements, quota and market-sharing agreements, discrimination as between like customers, and ties. In the ordinary course of events, Article 81(1) is unlikely to affect straightforward leasing transactions. Nonetheless, Article 81(1) could come into play if restrictions accepted in the context of a leasing arrangement fall within the ambit of Article 81(1). The analysis of a particular agreement’s compatibility with EC competition law must necessarily therefore proceed on a case-by-case basis. Those parts of any agreement which infringe the competition rules are automatically void and unenforceable under Article 81(2). This may put at risk an entire lease if it is not appropriate to sever the offending provisions from the main body of the agreement. 1.18 Environmental Protection Act 1990 (“EPA”) The EPA brings together or strengthens existing environmental controls contained in previous statutes. It deals primarily with contaminated land, pollution control, waste disposal and statutory nuisance. The Act places a number of compliance duties (and liabilities for breach of such duties) on both owners of land or premises, and also on persons carrying on a business which may cause environmental harm. Introduced by the Environment Act 1995, the EPA now includes a regime imposing liability for contaminated land. The aim of the regime, which came into force in April 2000, is to introduce a system whereby local authorities are under a duty to identify land where contamination is causing unacceptable risks to human health or the wider environment, as assessed in the light of the current use and circumstances of the land, and to seek remediation where it is deemed necessary. In determining who is liable for remediation, the EPA identifies three principal categories: those persons who caused or knowingly permitted the relevant substances to enter the land; or, where no such persons can be found, the innocent owner or occupier of the land in question. Where more than one person is identified as being liable, any costs for remediation may be appropriationed between them. Generally, the provisions of the EPA and emerging environmental legislation are complex and wide-ranging. In practice, they need to be considered carefully, particularly in the context of any leasing transaction where pollution or other environmental harm may be caused, not only in transactions involving land, but also where the leased asset is a moveable asset capable of causing environmental harm or, is used in connection with a business which is capable of causing such harm. 1.19 Contracts (Rights of Third Parties) Act 1999 Until the coming into force of this Act, the English law rule of privity of contract prevented a person who had been conferred benefits by a contract but who was not a party to this contract to enforce their rights and sue under the contract. The Contracts (Rights of Third Parties) Act 1999 which came into force on May 11, 2000 now enables third parties to enforce contractual terms where the terms of the contract purport to confer a benefit on the third party, unless on proper construction of the contract, it is thought that it was not the intention of the parties to confer such benefit on the third party. For the third party to benefit from these provisions, the third party must be expressly identifiable, either by name, class or description. The third party’s right of enforcement is subject to the terms of the contract and the parties can limit this right. It may not only benefit from and enforce rights granted to it but may also benefit from exclusion or limitation clauses. It will be possible for the parties to vary or rescind the contract without the third party’s consent provided that they expressly state this in the contract. Finally, the remedies available to a third party will be the same as those available in a claim for breach of contract. These provisions have generated some uncertainty and it is feared that it may make it possible to confer rights accidentally to third parties or may open the door to potentially litigation. The general tendency in the legal profession since the coming into force of the Act has therefore been to exclude its application. Note: This article was prepared in October 2003 by Norton Rose, the international law firm and a market leader in the areas of structured and asset finance. For further information on Norton Rose, please click here www.nortonrose.com or alternatively contact Alistair MacRae (partner) in their London office (+44 207 283 6000) Disclaimer: this publication is intended only to give guidance rather than definitive advice. Norton Rose accepts no liability for any errors or omissions in the information herein and accepts no responsibility for anyone who takes action and/or relies on any information that has been provided. Copyright: this publication is copyright © Norton Rose 2003. All rights reserved. Extracts may be copied provided their source is acknowledged.
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Saturday, February 4, 2012