LEGAL & TAXATION ASPECT OF LEASE

LEGISLATIVE FRAMEWORK
• Lease is defined under TOPA 1882 & Indian registration Act 1899 but relates to lease of immovable property • No exclusive legislation to regulate equipment lease in India as HP Act 1972 for Hire purchase is there • But lease resembles closely to “Bailment” Under Indian Contract act 1872. • Bailment is delivery of goods by one person to other for some purpose upon a contract that they shall ,when the purpose is accomplished , return or dispose off the property • Bailor resembles to lessor & bailee to lessee

BAILOR & BAILEE
• Bailor is responsible for putting goods in possession of bailee • Bailment doesn’t commence until goods are delivered • Bailor is required to disclose the faults in good bailed of which he is aware • Bailor responsible for any loss to bailee ( NOT APPLICABLE TO LESSOR) • Bailee bound to take reasonable care of leased assets • Bailee is responsible for his own negligent acts • Bailee not to act inconsistent with the agreement • Bailee must return goods on expiry of time fixed • Bailee required to pay sum specified • Bailee to protect bailor’s title over goods

LEASE DOCUMENTATION
• Lessee submits proposal to lessor which contains – Brief history – Financial statements of last 3 years – Projected financial statements of next 3-5 years – Existing long term debt obligations, lease & HP commitments – Information about equipment to be leased & place of installation • If proposal is approved by lessor it is communicated to lessee through letter of offer • Letter of offer is to be accepted by assessee by passing Board resolution & authorising a person to sign all agreements

LEASE DOCUMENTATION
• Where lease facility is in form of lease line , then master agreement is made and as & when equipment is transferred , particular of equipment , lease tenure & rental structure is incorporated in schedule • Registration under Indian Registration Act is optional • According to EXIM policy for Import lease: – MOA must include lease as objective – Lessee must have net worth of 1 crore – Lessee ( except PSU ) must be listed • According to RBI if Bank is participant: – Bank must hold 51 % paid up capital of subsidiary – Bank’s investment in subsidiaries doing leasing cannot exceed 10 % of its paid up capital & free reserves

CONTENTS OF LEASE
• No uniform format • Description clause – Description of lessor, lessee equipment & its location • Period clause – Tenure of lease & option of renewal • Rental clause – Amount of rental , periodicity mode of payment , rental pattern , initial deposit , penal charge • Exemption clause – That lessee has selected the equipment based on his own judgment & not relied on lessor’s representations & lessor expressly denies all obligations as to fitness & merchantability of equipment

CONTENTS OF LEASE
• Manufacturer’s warranty clause – Entitles lessee the benefit of warranty provided by manufacturer /supplier • Ownership clause
– No right would be passed on to lessee during lease & he cannot sell that assets to anyone else

• Equipment delivery clause
– Lessee should be responsible for taking delivery & possession

• Repairs & alteration clause
– Cost to be borne by lessee

• • • •

Insurance clause Surrender clause Default & arbitration Miscellaneous clause

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