Interpretation of the Supreme People's Court on Issues concerning the Application of Law in the Trial of Disputes over the Lease Financing Contracts has come into force since March 1, 2014 (‘Interpretation’)

Compared to the rapid development of financial lease business, Rules of the Supreme People’s Court on Issues concerning the Application of Law in the Trial of Disputes over the Lease Financing Contracts (No. 19[1996]Fa Fa) is relatively lagged. However, Interpretation has regulated many aspects on those issues related to the lease finance, such as the standard on identifying a lease financing relationship, how to link the lease financing contract with purchase contract, the protection for the leaser’s ownership to the leased item, etc. Hereinafter are 3 important aspects:

‘Sale-leaseback’ shall be deemed as the legal relation of finance lease

It’s disputable on whether ‘Sale-leaseback’ contract is a lease financing contract or a mortgage loan contract. Article 2 of Interpretation stipulates that ‘Sale-leaseback’ shall be deemed as the legal relation of finance lease, no matter whether the leasee and the seller are the same person.

Link the lease financing contract with the sale contract

In order to solve the disputes and reduce the loss related to the validity, dissolution of the lease financing contract and the sale contract, and arising from a sale contract related to a lease financing contract, Interpretation has stipulated as follows:

Where the sale contract is dissolved, confirmed as invalid, or revoked, or be rendered impossible to achieve the purpose of the financial leasing contract due to the seller’s reason, the lease financing contract can be dissolved.

In situations mentioned above, leaser can claim for compensations from lessee according to financial leasing contract, or when there is no arrangement or there is unclear arrangement, but seller and leased item are chosen by the lessee.

Where the lessee directly claims to the seller for the rights under sales contract, such as taking delivery of the leased item, or demanding for compensation, based on sales contract or lease financing contract, the leaser should enter into the suit as a third party. In other disputes caused by these two kinds of contracts, anyone who has legal interests can participate in the proceeding as a third party.

The protection for the leaser’s ownership to the leased item

During the period of the lease, the leased item is actually occupied and used by the lessee, so the risk of external transfer and mortgage exists objectively. Interpretation stipulates that the court shall not support the third person’s claim of bona fide acquisition in following situations:

The leaser marks on the prominent area of the leased item.

The leaser authorizes the lessee to mortgage the leased item to the leaser, and register the mortgage in the registration authorities.

The third party fails to check whether the leased item has been applied on lease financing transaction in accordance with the laws, administrative laws and regulations, local regulations or regulations stipulated by associations.

The leaser can prove that the third party is aware or should be awarded that the subject matter of the transaction is the leased item.