Lessors’ claims in finance lease lawsuits

A finance lease, with its dual nature of leasing funds and assets, involves the lessor, lessee (buyer) and seller. When any dispute arises, it is especially important for the lessor to know how to identify the claims to be submitted in order to protect its legitimate rights and interests, ensure the smooth progress of the proceedings and recover losses in a timely manner.

Claims must be based on legal provisions. As finance leases are concerned, the main legal basis involves Chapter 14 of the Contract Law “Finance Lease Contract” and the Interpretation of the Supreme People’s Court Concerning Application of Laws in the Trial of Finance Lease Contract Disputes (the interpretation). Promulgated and enacted in 2014, the interpretation provides effective judicial guidelines for the growing number of finance lease cases and clarifies direction for business activities of finance lease companies.

Pursuant to article 21 of the interpretation, “where the lessor submits claims demanding the lessee pay all outstanding rent under the contract and seeking termination of the finance lease contract, the court shall advise it to make a choice from the claims in accordance with Article 248 of the Contract Law. If the lessor decides to claim only for payment of all outstanding rent under the contract, but the lessee fails to fulfil the court rulings that support such a claim, any subsequent litigation the lessor initiates to seek termination of the finance lease contract and return of the leased asset shall be accepted by the court.”

Taking fully into account the dual roles of finance leases, i.e., leasing funds and assets, this article 21 provides further clarification on the lessors’ right of action under Article 248 of the Contract Law.

In choosing to demand payment of all outstanding rent under the lessee’s contract, the lessor is asking the lessee to continue with the performance of the finance lease contract. On full payment of such rent, the lessee shall be entitled to exercise its bargain purchase option to acquire ownership of the leased asset by paying the nominal purchase price.

Likewise, the lessors’ decision to choose the claim for termination of finance lease contracts and return of leased assets leads to contract termination in the usual sense. As the lessor owns the leased asset under a finance lease, the lessee only has the right to possess and use the asset until all rent and the nominal purchase price are fully paid. Therefore, when the contract is terminated, the lessee should return the leased asset to the lessor.

Since the lessor’s decision on the claim for payment of all outstanding rents from the lessee implies continued performance of the contract, a subsequent legal action instituted by the lessor to request termination of the finance lease contract and return of the leased asset does not violate the legal doctrine of “non bis in idem” if the lessee fails to fulfil the rulings that order continued payment of rents.

Based on the above, lessors’ claims in connection with finance lease disputes include the following categories:

1. Lessors’ claims for settlement of all unpaid rents and purchase prices by lessees on expiration of contracts. Instead of acquiring the ownership of the leased asset, the lessor of a finance lease is ultimately aiming to obtain the consideration for use of the leased asset from the lessee. This category of claims reflects lessors’ choice upon comparison between the present value and rents receivable of leased assets.
2. Lessors’ claims for return of leased assets by lessees upon expiration of contracts. During the term of a finance lease, the lessor retains ownership of the leased asset. When the contract expires with the lessee being unable to pay all outstanding rent, the lessor may request the return of the leased asset if it believes the said asset carries value not significantly lower than the total remaining rent or that the leased asset benefits from a strong universality or ease of disposal in the market.
3. Lessors’ claims for early termination of contracts, as well as return of leased assets and payment of damages by lessees. This category of claims is generally fit for circumstances where the lessor is unable to make up its loss of rent simply by taking back the leased asset due to the fact that the value of unpaid rents is higher than the present value of the leased asset. These claims are also clarified by article 22 of the interpretation.
4. Lessors’ claims for early termination of contracts, as well as return of leased assets and payment of rents due and payable by lessees. These claims are typically submitted under circumstances where the leased asset has present value sufficient to cover rents not yet due and payable. In other words, the lessor is able to be fully compensated if the leased asset is taken back. Besides, since the lessee has the obligation to pay rent due and payable under the contract, the lessor may submit all these claims at the same time without giving rise to double compensation.
5. Lessors’ claims for payment of all unpaid rents (whether or not due and payable) and the nominal purchase price before contracts expire. Prescribed by Article 248 of the Contract Law, this category of claims is also most commonly seen in practice. In essence, it points to continued performance of the contracts. In the event of the lessee’s failure to fulfil any obligations, the lessor may lodge a claim with a court for termination of the contract and return of the leased asset.

Except for the categories of claims described above, it is not uncommon that lessors ask courts to confirm their identity as owners of the leased assets until full payment of rent or return of the assets.

Usually intended as a preparatory step against the potential bankruptcy of lessees, the initiation of these claims facilitates lessors to exclude the leased assets from the pool of assets to be distributed in the bankruptcy proceedings so that they will be the only creditors entitled to repayment or compensation with such assets.

In general, a diverse range of claims may be lodged under cases involving finance lease disputes. For the purpose of maximizing receipt of rents receivable, lessors need to choose their specific claims with consideration to the present value of leased assets, as well as the business performance of lessees.

Xu Bangwei is a partner, and Xiao Jian is a paralegal at Jingtian & Gongcheng