Legal Aspects of Leasing

There is no separate law for dealing with leases of equipment. The laws governing leases are the law of contracts, or the Ii.e., the Indian Contract Act, of 1872, and the Transfer of Property Act, of 1881.  The Contract Act deals with lease agreements and the Transfer of Property Act deals mainly with the lease of immovable properties. As per common law principles, a lease of movable property involves 4 essential features:

1.  The subject matter of the lease, that is, the goods

2.  Transfer of possession of goods to the lessee

3.  Transfer of right to use the goods to the lessee

4.  Re-delivery of the goods by the lessee to the lessor on expiry of the lease.

Since the goods, being subject matter of a lease must have the following attributes as per common law principles:

1. Durability: The goods must be expected to last till the end of the lease term;
2. Movable: The leased goods should remain movable;
3.  Identifiable: The goods provided on lease should not be rendered unidentifiable;
4. Severable: The leased goods in the lessee’s premises should be in detachable condition, so that the lessor may retrieve them at the end of the lease without damage.

Lessor’s rights and obligations relating to leased asset:

Lessor’s rights and obligations relating to leased asset:

The right of the lessor as the absolute owner of the leased goods is generic.

Courts in India have accepted the lessor’s right over leased goods and always ruled in favour of the lessor in the context of hire purchase and lease transactions.

It is clearly understood that the lessee’s rights are limited to the right of peaceful possession and use.

In the event of a default, the lessor as the sole owner has the legal right to repossess the asset and there is no legal requirement for the lessor to seek court orders for repossession.

The lessor can make reasonable use of force to recover his goods. However, the Reserve Bank of India guided using the service of recovery agents in such instances.

Generally, it is a common practice in such situations for parties to decide to use either court assistance, or orders of an arbitrator, to avoid any unpleasant situations while removing the leased goods.

 The ownership rights of the lessor are protected under law even if the lessee becomes insolvent, distressed, or otherwise.

 No creditor of the lessee has a right to impound or attach the property belonging to the lessor.