Asset Finance: Schools Leasing – law confirmed

Readers may recall our lengthy article on the somewhat contentious schools leasing issue in a recent Briefing following the High Court judgment in the Schools Facilities Management case which can be found here. 

The Court of Appeal has now given judgment in the Schools Facilities Management case, and in essence the only point dealt with on appeal was a highly technical argument by the school that the fact that it had in effect overpaid the market rate during the period when it had made hire payments should be taken into account in reducing the market value to be paid to the funder for use of the asset after that time.

This issue does not apply in the vast majority of cases, so our conclusion is that the Schools Management case is good authority for what we have been saying for several years about this issue, namely that:

(1) the question whether a lease is to be characterised as a finance lease depends on expert evidence and is essentially for the school to prove;

(2) if it is characterised as a finance lease then it is highly likely to be found to be Ultra vires, meaning that the lease itself and its early termination provisions cannot be enforced by the funder;

(3) however, payments already made by the school under the lease cannot normally be recovered by the school because the funder has a valid change of position defence based on the fact that it bought the equipment from the supplier in good faith in the first place;

(4) in addition, the funder normally has a claim against the school for unjust enrichment in relation to the period during which the equipment has been used after any payments under the lease have ceased, and this is valued at the market rate of hire as established by expert evidence.

Funders operating in this area will be aware that various “ambulance chasing” outfits have appeared and are seeking to sign up schools to somewhat creative fee paying arrangements to challenge the enforceability of lease Agreements. It remains to be seen the extent to which the schools will have the stomach for taking these cases to trial, and the resources to garner the necessary expert evidence they will need to establish that leases are properly to be characterised as a finance lease in the first place.

Having said that now that the judgment in Schools Facilities Management has been dealt with on appeal funders should no longer be unduly concerned about establishing a negative precedent on this issue, because in reality the precedent is already there in the sense of the principles established by the case itself.

It is important to note that where proceedings are issued by a funder (or a counterclaim filed in response to a claim for repayment launched by a school) they should contain an alternative claim for unjust enrichment in case there is a finding that the agreement constituted a finance lease.

Contact Bermans Asset Finance team