Lessee Issues

(Leasing World 2010)

This is the third 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 some of the legal issues surrounding the Lessee.

Lessors in practice normally approach the identity of the Lessee almost exclusively by reference to credit-worthiness, but there are a number of other important considerations which can be material in relation to different categories of Lessee.

Consumers/Sole Traders

An individual Lessee contracting either as a consumer or as a sole trader should be straightforward as a contracting party, but what if the signature has been forged or an identity stolen? A Lessor can gain some degree of protection from following the Customer Due Diligence requirements set out in the Joint Money Laundering Steering Group Guidelines in relation to leasing and HP, but with identity theft in particular being a growing trend of increasing sophistication a Lessor can never be entirely sure that the individual it believes it is contracting with will ultimately be held to be legally responsible.

Partnerships

There is no record of membership of partnerships, and it can sometimes be a difficult question of law as to whether somebody is in fact a partner or is liable for holding themselves out as such. Even many relatively large partnerships still operate without any formal written partnership agreement, so the only evidence as to the existence of a partnership which may be available for inspection by a Lessor is a set of accounts, and by their very nature these are historical dealing with a period before the proposed lease or HP transaction. Probably the best way of finding out the names of current partners is to enquire with the firm’s accountants.

As a matter of law somebody involved in a business may not actually be a partner, but may still be liable to a Lessor if he or she has held himself out as such. So in a recent example of the insolvency of a long-established firm of Solicitors in the North West a number of “salaried” partners denied liability to Lessors on the grounds that they were not entitled to a share in the profits of the firm and therefore as a matter of law were not partners, but it was difficult for them to avoid liability because before entering the Agreements the Lessors had obtained the firm’s accounts which listed all the relevant individuals without distinguishing between salaried and equity partners and the salaried partners therefore held themselves out to the Lessors as being partners.

The effect of changes to members of a partnership during the currency of a lease or HP agreement is often misunderstood. As a matter of law it is those who were or held themselves out to the Lessor as partners at the time the Agreement was executed who remain liable for the performance of the Agreement, irrespective of whether they subsequently leave the partnership. Leaving the partnership may give them rights of indemnification against the other partners in relation to the Lessor’s claim, but is no defence to that claim.

Likewise those who join the partnership after the Agreement is executed do not automatically become liable to the Lessor; it is only if the Lessor agrees to a request to replace the liability of outgoing partners with that of incoming partners that such an arrangement has any legal effect.

Limited Liability Partnerships

LLPs are a recent creation of statute and effectively treat the entity as a body corporate, which means that Agreements must be signed by authorised members and that members have no personal liability. Thus it is good practice for Lessors to treat LLPs as if they were limited companies, and in appropriate cases require Personal Guarantees from individual members if they would require similar security from Directors in the case of a limited company.

Limited Companies

It is incumbent on those who operate limited companies to make it clear that the contracting party is a limited company, and the Companies Act provides that an individual who purports to contract on behalf of the limited company without showing the company’s name in its correct form incurs personal liability and this provision has successfully been used by Lessors against individuals on lease/HP agreements.

It is good practice to record the Company registration number of a limited company, since changes of name particularly in phoenix situations can lead to confusion where a Lessee seeks to avoid liability.

Unincorporated Associations

Many entities such as working mens’ clubs and various groups have no separate legal identity from that of the individual members, and are legally classified as “unincorporated associations”. It is commonly believed that liability on an Agreement rests either with those who signed on behalf of the association, or alternatively with the committee, but neither of these assumptions is correct. Assuming that the signatories had the actual or ostensible authority of the unincorporated association to enter into the Agreement, as a matter of law liability rests with each individual member at the time the Agreement was executed. The Lessor may face the difficulty of finding out who the relevant members were, and sometimes it is necessary to apply to the Court for disclosure of records or documents which may or may not provide the necessary accurate information.

Once the Lessor has identified a number of members at the time the Agreement was executed, it has the luxury of being able to sue whoever it chooses, since each individual member will be liable for the full amount due under the Agreement, subject to a common law indemnity from other members.

It is therefore good practice when dealing with unincorporated associations to require the provision of a list of members at the date of the Agreement together with confirmation that the signatories are duly authorised to enter into the Agreement on their behalf.

Local Authorities

Local Authorities are corporate bodies created by statute and can only act within their statutory powers. Since 1989 Local Authorities have effectively been prevented from entering into finance leases, so it is essential that a Lessor ensures that any lease with a Local Authority falls within the relevant statutory definition of an operating lease.

It is good practice to obtain a certificate from the finance director confirming that the Local Authority considers the lease intra vires, that it is an operating lease and that it is signed by a properly authorised officer.

Schools

Maintained Schools can only operate within a scheme approved by the Secretary of State and the School contracts as agent for the Local Education Authority, which is subject to the constraints on Local Authorities referred to above. So again finance leases are not normally permitted unless specifically authorised. Again it is good practice to obtain a certificate from the relevant governing body confirming that the Agreement is intra vires

In the case of independent Schools they are run by a governing body which is a body corporate which is not subject to the above constraints, but nevertheless either the relevant constitutional documents should be reviewed to ensure that the governing body has the power to enter into the Agreement or at least a certificate to this effect should be obtained.

NHS Trusts

NHS Trusts and Primary Care Trusts are effectively constrained from entering into finance leases, and in approaching operating leases are subject to public law guidelines which effectively require them to obtain best value. They are also obliged to consider EU public procurement procedures and criteria. Again it is good practice for a Lessor to obtain a certificate from a Trust to the effect that it is satisfied that a lease will be an operating lease intra vires and is signed by a properly authorised officer.

Questions of Actual and Ostensible Authority

Assuming that the Lessor has overcome the hurdles identified above and entered into what appears to be a binding Agreement, further issues of contractual capacity may still arise. The most common is the issue of authority: did the person(s) who signed the Agreement have actual or ostensible authority to contract on behalf of the Lessee? There is no easy answer to this question. Much depends upon the particular circumstances. Thus in a busy firm of solicitors who may well be an LLP it could normally be assumed that the Practice Manager or probably even Office Manager would have authority to enter into a photocopier lease, but each case depends upon its particular circumstances. Where the actual authority of a signatory is later denied the Lessor often seeks to rely on ostensible or apparent authority, but the key point here is that such apparent authority must come from the contracting party itself and not from the signatory: in other words the signatory cannot clothe him or herself with apparent authority, that can only be done by the contracting party itself and it is here that the Lessor’s argument sometimes falls down.

Security and Guarantees

One final point – when dealing with ancillary security documents such as personal or company guarantees or company debentures taken in support of lease or HP agreements it is essential to ensure that the contracting party is properly identified and that the appropriate person(s) signs the relevant documents, and in the case of Personal Guarantors who are not “fully involved directors” it is normally necessary to obtain a certificate from an independent solicitor to the effect that the individual(s) have been properly advised as to the nature and extent of their potential liability.

Reproduced by kind permission of Leasing World