How is a financial leasing contract regulated?
- Definition of financial leasing: Pursuant to Clause 7, Article 3 of Decree No. 39/2014/NĐ-CP:
+ Financial leasing is a medium or long term credit activity implemented on the basis of a financial leasing contract between the financial leasing company (the lessor) and the lessee. The lessor commits to purchase the leased asset according to the lessee’s request and retains ownership of the leased asset throughout the lease term. The lessee uses the leased asset and makes rental payments for the entire lease term as stipulated in the financial leasing contract.
- Accordingly, the subject matter of the financial leasing contract consists of assets eligible for financial leasing, which may include machinery, equipment, or other assets as prescribed by the State Bank of Vietnam. The State Bank provides detailed guidance on the types of assets that may be leased from time to time.
- A distinctive feature of the financial leasing contract is that it is an irrevocable contract, executed between the lessor and the lessee in respect of one or more leased assets. The parties are bound to perform for the entire contractual duration, and neither party has the unilateral right to terminate the contract before its expiration, except in specific cases prescribed in Article 21 of Decree No. 39/2014/NĐ-CP.
Parties’ rights and obligations to the financial leasing contract
A financial leasing contract is entered into between:
1. The Lessor
The lessor may be a finance company or a financial leasing company. Under current law, no other type of enterprise is permitted to conduct financial leasing activities. Accordingly, the lessor has the following principal rights and obligations:
+ Retains ownership of the leased asset throughout the lease term, unaffected even if the lessee goes bankrupt, is dissolved, or becomes involved in disputes or litigation with third parties.
+ Has the right to require the lessee to provide deposits or other security measures as prescribed by law, if necessary.
+ Has the right to inspect the management and use of the leased asset.
+ May terminate the contract before its expiration and demand full payment of the outstanding lease amount and related expenses if the lessee violates the contractual terms and conditions that constitute grounds for termination.
+ May repossess the leased asset if the lessee uses or exploits it contrary to the contract; may also request competent state authorities to take measures to secure the lessor’s ownership rights.
+ Evaluates the lessee’s financial capacity and credibility, the legality of the supplier, the technical specifications, type, price, delivery and installation schedule, warranty, feasibility and effectiveness of the lessee’s investment project, the leasing conditions, purpose of use, and repayment capacity.
+ Purchases or imports the leased asset as agreed upon in the contract.
+ Registers ownership and implements insurance procedures for the leased asset in accordance with law.
+ Is not responsible if the supplier fails to deliver, or delivers improperly, the leased asset under terms agreed between the lessee and supplier.
2. The Lessee
The lessee may be any entity (organization or individual) operating in Vietnam that has a need and directly uses the leased asset for its business or operational purposes. The lessee’s basic rights and obligations include:
+ Receives and uses the leased asset in accordance with the financial leasing contract.
+ Decides whether to purchase the asset or to continue leasing it upon expiration of the lease term.
+ Demands compensation from the lessor if the lessor breaches the contractual terms and conditions.
+ Takes responsibility for selecting the leased asset, the supplier, and contractual terms relating to the asset, including technical specifications, type, price, delivery and installation schedule, warranty, and other relevant conditions.
+ Uses the leased asset strictly for the agreed purpose; not to sell, transfer, or assign the right to use the leased asset to another entity, unless otherwise agreed in the contract.
+ Provides information about the supplier, quarterly business operation reports, annual financial statements, and other relevant information regarding the leased asset as required by the lessor; and to facilitate inspection of the leased asset by the lessor.
+ Pays rent and related expenses as stipulated in the financial leasing contract.
+ Not to use the leased asset as collateral, pledge, or security for any other obligation.
Conditions of the financial leasing contract
Pursuant to Article 113 of the Law on Credit Institutions 2010, the financial leasing contract must satisfy one of the following conditions:
Article 113. Financial leasing activities
Financial leasing is the provision of medium or long term credit based on the financial leasing contract, and must meet at least one of the following conditions:
1. Upon expiration of the lease term, the lessee shall receive transfer of ownership of the leased asset or continue leasing it under agreement of the parties;
2. Upon expiration of the lease term, the lessee shall have the priority right to purchase the leased asset at a nominal price lower than the actual market value of the asset at the time of purchase;
3. The lease term of an asset must be at least 60% of the time required to depreciate that asset;
4. The total rent payable for an asset under the financial leasing contract must be at least equal to the value of that asset at the time of contract signing.
Thus, the financial leasing contract is a conditional contract, and the parties must strictly comply with the prescribed conditions. If such conditions are not met, the contract will not be deemed the financial leasing contract and will not be governed by the specific legal provisions applicable thereto.
Conclusion
The above are some fundamental provisions on financial leasing contracts. Enterprises should carefully assess their needs and objectives before determining the most suitable financing method, whether through loans or financial leasing.
