Definition and Legal Nature of Leasing
Leasing is a contractual type under the law of obligations, in which the lessor grants the lessee the use of an economic asset for a specified period in exchange for payment of lease installments. In a legal context, leasing is characterized by the combination of elements from tenancy law, sales law, and financing. Lease agreements are particularly used for durable investment goods such as machinery, vehicles, or real estate and are an integral part of modern financing concepts.
Distinction from Related Types of Contracts
Leasing must be distinguished from purchase, rental, lease, and loans. In contrast to a purchase, the civil ownership of the leased asset remains with the lessor, while the lessee is only granted usage rights. Compared to rental, leasing typically differs through the transfer of maintenance and care obligations, as well as options for contract extension or acquisition (purchase option). A loan differs by the transfer of money, as opposed to the transfer of use in leasing.
Legal Basis under German Law
Statutory Provisions
Under German law, there are no specific statutory provisions for lease agreements. The legal relations are determined by contractual arrangement and measured against the general provisions of the German Civil Code (BGB). Case law and literature predominantly classify leasing contracts as “atypical rental contracts,” which apply both purchase and rental law provisions.
Types of Contracts: Operating Lease and Finance Lease
Two main types of contracts are distinguished:
Operating Lease
Operating leasing is characterized by short-term contract periods and the possibility of multiple subsequent rentals. The lessor bears the investment risk and is often responsible for maintenance and insurance. No substantive risks are transferred to the lessee in this case.
Finance Lease
Finance leasing is characterized by long contract durations, the assumption of substantial risks and burdens by the lessee, and economic attributes similar to financing. The lessee is often granted a purchase or extension option at the end of the contract. These contract types are firmly binding on both sides, and early termination is generally excluded.
Typical Obligations and Rights under the Contract
Lessor
The lessor is obligated to deliver the leased object at the agreed time and in contractually compliant condition. Furthermore, he is obliged to legally and factually refrain from interference. Transfer of ownership does not usually occur; during the contract term, the object remains in the lessor’s ownership.
Lessee
The lessee is obligated to pay the contractually agreed lease installments. He is also responsible for the careful handling and maintenance of the leased property. He generally bears the risk of loss or deterioration (transfer of risk), provided this is contractually regulated. With finance leases, a residual value or surrender obligation may be agreed upon in addition to the lease payments.
Special Forms and Deviating Structures
Sale-and-Lease-Back
This special form describes the sale of an economic asset by the future lessee to a leasing company, which subsequently leases the asset back to the former owner. This construction enables liquidity to be generated while continued use is maintained.
Partial and Full Amortization
With full amortization leasing, the lease payments cover the entire investment cost including the lessor’s profit and incidental costs. In partial amortization, a portion of the investment is covered by the payments, the residual value remains as a risk for the lessor or is compensated by realization after the contract ends.
Risks and Liability
Defects in Fact and Title
For defects in the leased object, different liability concepts may apply depending on contract design. Generally, warranty claims are excluded and instead referred to the supplier (so-called “lessee as risk taker”). This is effected through the “assignment of warranty rights” from the supply contract to the lessee. The lessor’s own liability is usually excluded unless he knowingly supplied defective goods or provided warranties.
Assumption of Risk and Insurance Obligation
The risk of accidental loss or deterioration typically passes to the lessee. Accordingly, regular insurance against damage, theft, and loss is contractually required. The loss of usability does not automatically release the lessee from the obligation to pay.
Leasing in Insolvency Law
Insolvency of the Lessor
In the event of the lessor’s insolvency, ownership of the leased object remains in the insolvency estate. The insolvency administrator may refuse surrender under § 103 InsO or continue the lease object. The lessee is obliged to return the object if the contract is not continued.
Insolvency of the Lessee
In the event of the lessee’s insolvency, the insolvency administrator has the right to choose whether to continue or terminate the contract. Lease payments that became due before the opening of insolvency proceedings constitute insolvency claims. Payments due after the opening are obligations of the estate.
Tax and Accounting Treatment of Lease Agreements
Commercial Law Classification
For accounting assignment of the leased asset, the decisive factor is whether the economic ownership lies with the lessor or the lessee. For finance leasing, especially the principles under the German Commercial Code (HGB) and the definitions of IDW RS HFA 13 are decisive.
Tax Treatment
For income tax purposes, lease payments are generally considered operating expenses. Depreciation (AfA) is available to the accounting owner. For finance leasing, the asset may be allocated to the lessee for tax purposes if he holds economic ownership.
International Aspects and Special Features
European Union
There are no uniform rules within Europe, but numerous national regulations and court decisions contain comparable criteria for classifying leasing contracts. IFRS (International Financial Reporting Standards) provide for an accounting treatment based on criteria of control and risk transfer, particularly under IFRS 16.
Consumer Protection and Leasing of Consumer Goods
Consumer protection rules, as found for example in distance selling law, the law regulating withdrawal from door-to-door contracts, and the Payment Services Supervision Act (ZAG), may apply to certain leasing contracts, particularly those involving consumer leasing.
Summary
Leasing is a versatile and legally complex contractual structure that combines elements of finance, property, and tax law. The classification and handling of risks, obligations, accounting, and liability depend largely on the specific contractual arrangement. Due to the variety of forms, a differentiated assessment considering case law and tax guidelines is essential.
Frequently Asked Questions
Who bears responsibility for defects in the leased item during the contract period?
In a legal context, responsibility for material defects during the leasing period generally lies with the lessor. At delivery, the lessee is entitled to receive the leased item—such as a vehicle, machine, or property—free from material and legal defects, as provided by § 535 BGB and specific leasing contract regulations. If a defect arises within the warranty period, the lessor must rectify it and assert claims against the manufacturer or seller. In so-called finance leases, contract provisions may allow the lessee to assert claims for defects directly against the supplier (so-called benefit adjustment), whereby the lessee may need to waive his rights against the lessor. If contractual rights have been transferred to the supplier, the lessor remains liable for proper enforcement of these claims and for any damages if he fails to fulfill his duty to cooperate. During ongoing use, however, wear and tear or improper use—issues not considered defects—are the responsibility of the lessee. The precise extent of responsibility thus depends primarily on the chosen leasing model and the individual contractual clauses.
In which cases can a lease agreement be terminated early?
Lease agreements are legally structured as continuing obligations for a fixed basic lease term, and ordinary termination is generally excluded during this period. Early termination is essentially subject to strict legal requirements. Both parties have an extraordinary right of termination under § 543 BGB if an important reason exists making continuation of the contract until its normal termination unreasonable. Typical reasons include serious breaches of contract such as significant payment delays by the lessee, persistent non-fulfillment of contractual duties, or insolvency of one of the contractual parties. For consumer leases (§§ 506 et seq. BGB), there are also special consumer protection rules granting rights of withdrawal or revocation within legally defined periods. If the contract is terminated early, provisions about any prepayment penalty and handling of the leased object must be observed both contractually and legally. Frequently, early termination is contractually regulated in exchange for a so-called prepayment penalty to compensate the lessor for lost profit.
What rights and obligations does the lessee have regarding the use of the leased object?
Under German law, the lessee is obliged to exercise due care and to use the leased object in accordance with the contract, as stipulated by § 536c (1) BGB. This means he must use the leased object for its intended purpose and refrain from anything that could cause depreciation or damage not resulting from normal use. Alterations or conversions of the leased item may only be undertaken with the express consent of the lessor. The lessee bears the risk of damages arising from improper handling or contractually improper use. After the contract expires, the lessee is required to return the leased object in contractual condition, whereby usual signs of use are deemed acceptable. Depending on the contract, repair, maintenance, and care obligations may be assigned to either party, though in practice most often to the lessee. If the lessee fails to fulfill his obligations, claims for damages or early termination of the contract may arise.
What are the statutory requirements regarding the form of lease contracts?
As a rule, lease agreements must be in written form pursuant to § 550 BGB, especially if they are intended to run for a longer period (more than one year). Written form is required to ensure legal certainty for both parties and to confirm the validity of essential components—such as precise identification of the leased object, duration, amount and due date of lease installments, as well as rules concerning return or possible acquisition. In consumer leasing (§§ 506 et seq. BGB), special information obligations must be observed, including the effective annual interest rate, the amount and number of installments, and the right of withdrawal with clear consumer instructions. Failure to comply with form and information requirements may result in the lease being declared void or unenforceable, with the corresponding legal consequences, such as reversal or claims for damages.
What are the consequences if the lessee becomes insolvent for the lease agreement?
In the event of the lessee’s payment default (insolvency), the lease contract becomes a so-called continuing obligation under the Insolvency Code (InsO). Pursuant to § 108 InsO, the insolvency administrator has the option to uphold or terminate an existing lease contract. If the administrator opts for termination, the lessor may demand return of the leased object. Outstanding lease payments that fell due before the opening of insolvency proceedings must be filed with the insolvency administrator as insolvency claims. For the period after commencement of the proceedings, the lessor can demand ongoing lease payments as claims on the estate, meaning they are given priority. If, however, the lessor terminates due to payment arrears before the proceedings begin, early dissolution can be legally effective if contractual and statutory requirements are met.
Who is responsible for insuring the leased item and what are the legal minimum requirements?
As a rule, the lease contract obliges the lessee to provide sufficient insurance cover for the leased item. Legally relevant in this context is comprehensive insurance—especially for motor vehicles—to cover both third-party damage and self-inflicted damage. In such cases, the policyholder is typically the lessee, but the lessor remains the secured party or economic owner, to whom all claims against the insurance are usually assigned. In addition to mandatory third-party liability insurance, the lessor may stipulate further insurance obligations in the contract, such as coverage against theft, natural hazards, or a GAP insurance (covering the difference between replacement value and outstanding lease obligations). Concluding and providing proof of such insurance is often a prerequisite for delivery of the leased asset; failure to comply may result in contractual penalties or extraordinary termination by the lessor.
What legal consequences result from failure to return the leased item after contract expiry?
Non-return or delayed return of the leased item by the lessee after contract expiry constitutes a breach of duty under § 546 BGB. After an unsuccessful deadline, the lessor can sue for surrender and also claim damages. The assessment of damages may include any loss of value, lost lease payments, and further consequential damages. Additionally, the lessee often owes compensation for use for the excess period, based on the last agreed lease installment. Depending on the contract, further sanctions such as lump-sum compensation claims or contractual penalties may apply. If alterations were made to the leased item or there is damage exceeding ordinary wear and tear, the lessor may also claim the restoration costs. In extreme cases, the elements of embezzlement (§ 246 StGB) may be examined if there is neither a return nor a retention of title.
