Agnes Tibayeita IsharazaHead Legal/ Company Secretary

dfcu Bank LimitedMember, Technical Committee, Leasing Legislation

Task Force

LEASE CONTRACTS: COMMON TERMS

OBJECTIVES OF THE PRESENTATION1. The typical contracting terminologies used in

leasing.2. The relevance of a lease schedule in relation

to a master lease agreement3. Other documents involved in a lease

transaction4. Difference between a lease agreement and

asset finance agreement

LAYOUT

1. Background2. Common lease agreements 3. Common lease contractual terminologies4. Leasing and hire purchase5. Leasing and asset financing6. Conclusion

BACKGROUND

The focus of this discussion is on leasing as currently practiced in Uganda - no governing law to serve as a central reference point (save for applicable provisions in some tax laws). Reliance is generally placed on common law principles, general contract law and judicial precedents. Lease contracts are therefore paramount in defining lease relationships.

Background - continued

Common types of leasesFinance leasing - risks and rewards of ownership transferred to the lessee. Also defined as non – cancellable because the lessor only bought the asset for the lessee BUT can be terminated

Background Continued

Operating leases ( a.k.a Contract Hire)- a contract that allows for use of an asset without transferring title. No intention of title transfer from the onset. Structured to ensure there is a residual value at the end of the lease to enable – resale, secondary lease….etc

Background Continued

Lessee

Supplier

Lessor

Insurer

Landlord Landlords Waiver

• Master Lease Agreement

• Lease Schedule

• Sale& Lease back

Supply Agreement

Insurance Policy/Insurance Premium Finance

PARTIES TO A LEASE AND THEIR CONTRACTUAL RELATIONSHIPS

Common Lease Agreements

MASTER LEASE AGREEMENTA Master Lease Agreement is a contract between a lessee and lessor for the lease of an asset. It sets out the general terms and conditions of the relationship between the parties. Because of this – it is also referred to an an “umbrella” agreement.

Common Lease Agreements

LEASE SCHEDULE ( FINANCE OR VEHICLE)This is an appendix to the MLA which sets out the specific terms applicable to a given lease such as the particulars of the leased asset, lease start and end date, rental payable and frequency …….etc

Common Lease Agreements ctd

SUPPLY AGREEMENTBetween the lessor and supplier.

MAINTENANCE AGREEMENTBased on the type of the asset, there may be need for a formal maintenance agreement which will be between the lessee, service firm and or the lessor

Common Lease Agreements

INSURANCE PREMIUM FINANCING AGREEMENT:The lessee may obtain a credit facility to clear the premium payable for the asset’s insurance cover.

SALE AND LEASE BACK

LANDLORD’S WAIVER

COMMON LEASE CONTRACTUAL TERMINOLOGIES

LEASE: A contractually binding agreement between two parties in which the owner of an asset ( the lessor) grants another party ( the lessee) the right to its exclusive possession and use for a specified period in return for specified periodic rental or lease payments.

Common Lease Contract terms

THE PARTIESLessee: A person to whom a lease is granted User or renter of a leased asset/propertyPerson who pays for the use of the asset

Common Lease Contract terms

Lessor: Owner or title holder of the asset which is

rented/leased out under a lease agreementParty that receives payments from a lessee in

exchange for the use of a leased assetLender and secured party in a finance lease

Common Lease Contract terms

Asset/Equipment description: for certainty in the event of a dispute, repossession, tax purposes ( e.g. capital allowance treatment for plant and machinery) Acceptance : unconditional acceptance of the equipment by the lessee The Lease Period: When and how the period begins: is there a pre- lease period ( commonly called “pre-delivery”)

Common Lease Contract terms

Rental and payment terms:Periodic payments made by a lessee to a lessor for the use of the lessor’s assetWhen the first payment falls due, how much, any grace period, any penalties for late payment, VAT inclusive or exclusive, currency and mode of payment, rental adjustment provisions ( e.g if payment is tagged to a variable interest …….etc)

Common Lease Contract terms

Prohibitions on Lessee dealing with the equipment in any way not authorized by the Lessor – sub letting, mortgaging, alterations, moving the asset…etc

Repossession: The lessor must have a right to repossess the asset on default. The agreement provides an express right of entry

Common Lease Contract terms

Maintenance: responsibility varies depending on the type of leaseLessor’s right over the asset: to inspect, publicize its interest over the equipment ( inscriptions) Insurance: responsibility varies depending on the type of lease

Common Lease Contract terms

Inspection: The lessor has a right to inspect the asset at periodic intervalsExclusion of liability for the Lessor: for the condition of the equipment, and any other warranties related to the equipment including defects in title from the supplier, claims by third parties. The risk of loss or damage to the equipment is borne by the lessee Quiet Possession:

Common Lease Contract terms

Lease Termination: under what circumstances and how the lessor is

to be compensated by the lessee ( for the reason that the rental payments were structured to ensure the lessor fully recovers by the end of the lease period)

termination could be – voluntary, by total loss of the asset or through default.

events of default must be laid out ( e.g default on rental payments…..etc) .

Common Lease Contract terms

Termination Sum: the sum a lessor is entitled to due to early termination of the lease ( includes loss of future rentals - present value of the future rentals)

Option to Purchase: For finance leases – the nominal fee payment at the end of the lease period to transfer title

LEASING AND HIRE PURCHASE

More or less similar except:Option to purchase: its payment transfers title in a finance lease. Full payment over a defined period transfers title in a hire purchase.. Usually no requirement for an initial deposit for a hire purchase (?)

NB: The contents of the Hire Purchase Agreement and Master Lease Agreement will defer accordingly

LEASING AND ASSET FINANCEAsset financing is obtaining credit for the purchase of, and or secured by an asset. E.g finance leasing, hire purchase…..Leasing is one of the forms of asset financing.NB: The specific type of asset finance will determine the contract documentsrequired. Key terms: initial deposit required ( if any), collateral, additional covenants …..etc

CONCLUSION

Uganda is in the process of developing a leasing law which, when passed, will harmonise lease terms, rights and obligations of parties in a lease transaction, modes of enforcement ….etc

All the terms described herein shall accordingly be addressed by the said law. All stakeholders are urged to participate in the development of this law to ensure it is all inclusive and effectively addresses leasing as a viable asset finance option.