Acquisition by Equipment Lease Purchase

The Nature of Lease Purchase

Lease purchase is a term used in the leasing business for a transaction which is, in effect, a hire purchase arrangement. Like a finance lease, it is a means of financial acquisition rather than use alone, and its practical effect, legal documentation and accounting treatment are virtually identical.

However, lease purchase differs from a finance lease in that, unlike a finance lease, it includes an option in favour of the lessee to purchase the equipment. As lease purchase is technically a contract of hire, the lessee can return the equipment at any time (although the lessor will seek compensation for loss of his profits on the agreement).

Before entering into a lease purchase, you should take professional advice about, firstly, whether that form of financing is appropriate for you, and secondly the accounting, tax, capital allowance, and balance sheet consequences of the particular commercial and legal terms of the lease purchase contract you are considering.

Lease Purchase Documentation

The structure, documentation and terms of a lease purchase arrangement generally follow those of a finance lease. As with a finance lease, there may well be a master agreement governing all the future transactions between lessor and lessee and equipment leasing contracts covering each individual transaction and item of equipment.

However, the hirer will also have an option to purchase which will be built into the agreement as well as what will happen if the option is not taken.

Whilst there may be limited room for negotiation of such an agreement with a large finance company, this may be possible with larger transactions.