Leasing Law in Germany

The leasing contract as a "rental agreement" has the following characteristics:

• Responsibility: The lessor bears the full risk for the object. He is responsible for maintenance, insurance, repairs etc.
• Cancellation: The contract can be terminated immediately or within a short period of time. The leasing object can be rented again.
• Payment: (monthly) rent
• Property: The lessor is the owner of the property. This contract is recommendable if the lessee wants to use the object less than the "normal useful life" (<40%).

Characteristics of the finance-lease contract:

• Responsibility: The lessee is responsible for the leased property and therefore the possible risks incurring.
• Termination: The contract provides for a fixedly agreed basic rental period.

During this period, the contract can not be terminated by either both parties. If the lessee does not pay the rent in time, the lessor can terminate the lease without notice and demand for compensation. The basic rental period is at least 40 and not more than 90 percent of the "normal" useful life, so that the object remains not only legal but also economic property of the lessee for tax purposes. These are e.g. Two to four years in the case of vehicles, two to four and a half years in computer equipment, and four to nine years in certain machines, and ten to 22.5 in real estate.

Payment: The cost of the object plus the profit for the lessor is paid by the lessees (depending on the type of contract), either by installments or through installments and deposits or debits (start, end of the basic rental period).

There are two types of finance lease contracts:

"Full amortization contracts" and "partial amortization contracts"

Full amortization means that the lessee covers the entire costs, the acquisition or manufacturing costs and all ancillary costs, during the basic rental period.

Possibilities of contract arrangement: Leaseholders and lessors may agree that after the expiry of the basic rental period

• the object returns to the lessor.
• the lessor places the object at a low residual value, e.g. ten percent, that can be bought (specialist margin "purchase option").
• the lessee can extend the lease-term (reduced rate).

Denotation of the partial amortization contract:

• The lessor does not cover the entire costs during the basic rental period. There is generally a residual amount, which is the calculated residual value.
• The residual value after the expiration of the contract has been agreed by the lessee and lessor before the conclusion of the contract.  Ideally, the contractually agreed residual value is the actual market value at the end of the lease term. The lessee has therefore did not pay excessive or too low installments because the residual value was calculated correctly.

Possibilities of contract arrangement: Leaseholders and lessors may agree that after the basic rental period expiries:

• the object  returns to the lessor
• the object is sold to a third person at fair value. The lessee may also act as an equally interested buyer. If the actual sales proceeds are higher than the residual value of the object, the difference is 25 percent to the lessor (specialist margin "profit sharing"). In terms of cost, this means an increase in the financing that could have been avoided with a more appropriate residual value selection. If the proceeds are smaller than the residual value, the lessee must pay the difference to the lessor. This contractual arrangement also regularly entails a "right to exercise". The lessor may request that the lessee purchases the object at the agreed residual value.

Special cases: The redeemable finance-leasing contract

Here the lessor and the lessee agree that the leasing contract can be terminated. The contract shall be concluded for an undefined period of time. The contract can be terminated at the earliest after the 40 per cent of the average useful life. The lessee must make a final payment.

Credit or leasing

Companies interested in leasing should consider this alternative after several consultations with experts, leasing companies or banks.  In addiction the principal bank must provide the lessor with the credit worthiness of the lessee. The bank also advises which property can be leased without jeopardizing access to funding.