(From my book: Banking & Corporate Business Laws)
Leasing business, as a new banking instrument, has grown vastly to be an outstanding excellent delivery mechanism for all types of businesses and institutions including many government entities. In most countries there is, usually, a law or regulation governing and defining leasing activities. Based on this, leasing companies in certain regimes should be regulated and, somehow, supervised by central banks.
This kind of investment banking activity, however, should be regarded and taken with utmost care due to the legal and financial implications associated to it. Failure to carefully examine the lease activity or the lease proposal or failure to ascertain the exact parameters of a proposed leasing transaction can have profound financial and legal consequences.
Repercussions as a result of lack of awareness in these respective fields have and always continue to cost business organizations and institutions a lot of money and other loses.
However, this business is not free from encumbrances. In fact, in many places it is not clear who should be responsible in the institution to decide on leasing, to examine the cost reduction and bottom line profits as it relates to equipment leasing or project financing?
Is it the responsibility of the procurement dept., accounts dept., the controller, or should it be that of all personnel involved within the leasing process. This point should be carefully studied and decided upon so as to give the job and direct responsibility to specific persons or dept.
While in the process of leasing it is, also, essential to know that each funder has different rates, different policies, different terms and conditions, different billing procedures and documentation. It is also imperative to note that in large funding applications with long-term requirements, securitization of funds with one or more lenders may become part of the leasing contract. Therefore, the person or dept. responsible for signing a lease agreement or other financial contract should be fully prepared to understand every aspect of the agreement.
As a matter of practice, unfortunately, few contracts actually end up priorising the client s needs; many contracts have hidden and or undisclosed exposures. However, we could say that no one person or company or institution is immune from this invisible side of leasing activities. This is true and could happen to all operations being large, medium or small. We could face this situation in any of the leasing contracts being small or large, and it makes no difference whether the lease contract is for small car or a fleet of planes or vessels. In other words, let the buyer beware, because there could be unforeseen exposure conditions in all types of leasing contracts. Here comes the importance of leasing know-how.
In all cases, the funding agreement should be carefully read and verified by concerned personnel. Some contracts are very small and short while other contracts could be very long and includes very complicated details. Are there end-of-term obligations or exposures you may not be aware of such as escalation clauses providing for increased payment amounts during the term of the lease or early termination penalties etc.?
All these points should be taken in consideration at the time of negotiating the deal and signing the agreement. Once the agreement is signed, of course, it is very difficult to make any change to the provisions therein.
Knowledge and awareness about leasing agreements is mandatory particularly among the persons and departments responsible for leasing contracts and finances. Clear strategy for leasing should be there, we mention this because it has been noticed that there are many places where they are not aware that they spend more than they need to on their leases.
It has been observed that many problems occur quite often when different departments, in one place, administer and follow leases. There are reasons, of course, and benefits for decentralization purchasing, however, when it comes to leasing it has been proved that centralized administration reduces many risks that encumber the components of a lease contract.
As leasing business activity is growing due to many factors, including administration \ availability of funds, know-how, timing….etc. It would be more appropriate to look into above points while considering any leasing venture, so as to make it a winning useful game ..
Dr . AbdelGadir Warsama Ghalib
Founder & Principal Legal Counsel
Dr.AbdelGadir Warsama Consultancy
E-mail : awarsama@warsamalc.com
