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Leesors’ Obligations

(Leasing World 2010)

This is the fifth of a series of 6 bi-monthly articles during 2010 in which Bermans’ Partner Peter Sinnett sets out a basic introduction to some of the legal issues arising from cradle to grave in a typical Leasing/HP transaction.

This article explores the nature and extent of Lessors’ obligations.

Many of the Lessors’ obligations are implied by statute, and a tension exists between attempts to exclude liability by express terms in Finance Agreements and the application by the Courts on a case by case basis of a statutory test of “reasonableness” which controls such exclusions.

Provision of Equipment

Of course the most basic of the Lessors’ obligations is to provide the equipment in the first place, but even this is not absolute. There are circumstances in which the Lessee’s signature on a clearly worded representation as to delivery in a Certificate of Acceptance will lead to it being estopped (or precluded) from denying receipt if the Lessor has legitimately relied on it.

Quiet Enjoyment/Passing of Title

The Lessor must provide quiet enjoyment of the equipment during its Lease, and be able to pass title at the end of a HP Agreement. The only practical exception to this is in sale and Lease or HP back, where the Lessee would not be allowed to complain of matters arising from its own inability to pass title to the Lessor in the first place.

Correspondence with Description

There is an implied condition that equipment corresponds with description, for example where it is described as “New” or by reference to a specific make or model. This can lead to significant difficulties when it later emerges that the description is inaccurate.

Satisfactory Quality/Fitness for Purpose

The implied terms as to satisfactory quality (previously called merchantable quality) and fitness for purpose of equipment are the cause of most difficulties in practice. But before considering the impact of exclusion clauses it is worth pointing out that the mere fact that a Lessee has problems with equipment does not necessarily mean that the equipment fails these requirements. Very often there is an element of operator misuse or misunderstanding in the proper approach to maintenance and servicing of equipment, and in many such disputes expert evidence can be deployed to establish that the fault lies with the Lessee and does not reflect an inherent defect in the equipment.

Statutory Control of Exclusion Clauses

All Finance Agreements can be expected to contain detailed express exclusion clauses seeking to negate the Lessor’s liability in the event of failure to comply with such obligations as may be implied by statute. In general terms the effect of the Unfair Contract Terms Act 1977 is to outlaw exclusion clauses which relate to the passing of title, or those which exclude liability in relation to the Lessor’s obligations as to description, satisfactory quality and fitness for purpose of equipment in relation to consumers, but to permit exclusions in relation to description, satisfactory quality and fitness for purpose for non-consumers subject to a test of “reasonableness”.

There are statutory guidelines as to the approach to be adopted by individual Judges in deciding “reasonableness”, including the relevant strength of the parties’ bargaining positions and whether the Lessee knew or ought reasonably to have known of the existence and extent of the term, but in practice the Courts have tended to take into account all relevant circumstances.

It is fair to say that the application of the reasonableness test remains uncertain, and it is one of the main functions of an asset finance litigation lawyer to predict the outcome of the test on the facts of each individual case in which the issue arises. Some Lessors have come close to effectively taking a policy decision never to argue the point at a contested trial. It is certainly the case that great care needs to be taken in choosing cases which are run to trial, partly due to the risk of defeat and the costs consequences and partly due to the danger of a precedent being established which could then be used against the industry in future cases.

Lobster Group Limited v Heidelberg Graphic Equipment Limited & Close Asset Finance Limited

The most recent authority on the effectiveness of exclusion clauses in a Lease Agreement is Lobster Group Limited v (1) Heidelberg Graphic Equipment Limited (2) Close Asset Finance Limited [2009] EWHC 1919 which involved a printing press worth £1.2 Million. This case caused headlines in some of the legal press because the Judge struck down the exclusion clauses in Close’s Lease Agreement as unreasonable, but in my view much of that comment has been ill-founded and it is worth noting the following:-

(1) one of the main planks of the Judge’s decision seems to have been that the Lessee had originally agreed to buy the equipment from the Supplier, and in the Judge’s view it would be wrong for the Lessee to be prejudiced by receiving lesser rights under the Lease Agreement than it would have done had it gone through with the purchase from the Supplier;

(2) the attack on the reasonableness of the exclusion clauses by the Lessee included the points that:-

(i) Close’s Terms and Conditions “were so small as to require a magnifying glass to read them which demonstrated the lack of emphasis placed on them”; and

(ii) Close was highly experienced in relation to printing presses and financed some 40% of the Supplier’s output;

(3) Close’s claim against the Supplier for an indemnity had been settled and they were jointly represented in the claim against the Lessee;

(4) this was a case of a relatively minor defect which did not go to the root of the Lease Agreement and therefore did not excuse the Lessee from liability to pay Close the termination sum of £340K; and

(5) the case graphically illustrates a Lessee’s difficulty in proving recoverable loss and damage even if exclusion clauses are struck down; the Lessee’s claim for loss of profits of £1.653 Million was reduced to nil, and its sole recovery was for £14,543 as the costs of rectifying faulty printing.

Thus in my view if any lesson is to be derived from the Lobster case it is not necessarily that all exclusion clauses in Lease and HP Agreements for middle ticket equipment are likely to be struck down, but rather that a Lessor should always be able to enforce an indemnity against a Supplier who remains solvent and that it is very difficult for a Lessee to prove recoverable loss or to recover loss of profit at all.

Responsibility for the Supplier’s Obligations

In general terms a Lessor is not responsible for misrepresentations of a Supplier, save in the case of a regulated HP Agreement nor will a Lessor be responsible for a Supplier’s failure to comply with a Service and Maintenance Agreement with the Lessee, though this should be expressly stated where a Lessor collects maintenance payments on behalf of the Supplier as part of the Lease/HP arrangements.

In some circumstances it is worth considering imposing a clause on the Lessee which gives a Lessor the right to appoint an alternative service provider in the event of the Supplier’s demise, and it is becoming more common to see clauses purporting to allow such obligations to be novated or transferred without the Lessee’s consent.

Final Thoughts

Of course there is one way of a Lessor avoiding all the issues described above and obtaining an absolute right to repayment by instalments – the simple device of the loan, but if life were that simple there would be a lot less for lawyers to write about.

Reproduced by kind permission of Leasing World.