Question

What is meant by Chattel Lease? Give an example.

Answer 1

Contracts for the leasing of chattels are invariably governed by a standard-form contract. The terms which are commonly inserted in such a contract are reproduced in the Appendix to this article.! It is the purpose of the article to analyse chattel leasing agreements with reference to the provisions of the standard-form contract, and to pinpoint areas where the law in relation to such transactions is in need of reform. Comparisons will be made with developments in South Australia where the enactment of The Consumer Transactions Act, 1972, has resulted in increased protection for the position of the lessee under a leasing agreement.2 It is pertinent at once to distinguish a hire-purchase agreement, which contains an option to purchase the goods at the end of the hiring period, from a simple leasing arrangement, which does not. Provided no option to purchase the goods at the end of the hiring period is given to the lessee either in the chattel leasing agreement itself or in a separate collateral agreement, 3 the protection afforded by The Hire-Purchase Act, 1959 (Qld.) to the hire-purchaser is inapplicable to the lessee's situation under a simple hiring agreement. The courts will, however, admit parol evidence to see if the transaction does contain an element of purchase, even though the parol evidence appears to contradict the written lease.4 Despite this attempt to legally distinguish a hire-purchase agreement from a leasing agreement, the two transactions in commercial reality are often similar since, in all but short term hirings, there may well be a "business understanding" between lessor and lessee that the lessee will have the "chance" to buy the goods at the end of the leasing period for the residual cash value expressed in the agreement.s In many cases it may be impracticable to return the goods at the end ofthe lease in any case (e.g. lifts, an air-conditioning plant).6 In all leasing agreements the legal relationship between lessor and lessee is that of bailor and bailee, but it is useful to differentiate their commercial uses. Simplistically three broad divisions can be made:-

(a) The leasing of equipment to a commerical undertaking to be used for the purposes of the business. The lease is often taken from a finance house who purch.ases the goods from the supplier, but the supplier may itself be the lessor, especially in cases where he is to provide ancillary services such as maintenance. 7 The advantages to a business venture of leasing have been well publicised, 8 but can be briefly summarised:-

(i) It avoids the problem of purchasing equipment which may soon become obsolescent, or which is only needed for the particular shortterm venture the organisation is engaged in. In the case of leasing new machinery it ensures that the equipment need only be kept for its likely period of maximum efficiency. At the end of the lease period the goods can be returned, the lease renewed (if there is an option to do so), or bought.

(ii) It avoids the necessity of large capital expenditure, when capital may be unavailable and which, if available, can be used for other profit-making purposes. For example, a fIrm with a high profit-making turnover would wish to keep as much capital as possible available for stock purchase.

(iii) It avoids having to show a hire-purchase commitment or a borrowing as a balance sheet liability, and it thus may be easier for the company to obtain credit elsewhere.

(iv) The lessee is not necessarily obliged to pay a deposit. Compare this with the statutory 10 per cent under Section 25 of The Hire-Purchase Act, 1959, (Qld.).

(v) Lease payments are deductible in computing profits for income tax purposes provided the goods are used in the production of assessable income, the lessee is given no option to purchase, and the lease payments are based on a depreciation rate which will reduce the value of the goods to a reasonable and acceptable figure at the end of the lease. The tax advantages of leasing over hire-purchase, or purchase by means of bank overdraft (if available) must not be over-emphasised. Often the main advantage is the benefit of deducting the lease payments at an earlier date than it is possible to deduct amounts for depreciation in the case of sale or hire-purchase. Generally leasing will not significantly reduce the amount of tax payable.