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General
Overview of Leasing and Rental Agreements: Definitions
and Main Characteristics of Lease Agreements (“Arrendamento Mercantil”)
and Rental Agreements (“Locação de Bens Móveis”)
The purpose of this text is
to provide a general overview of leasing operations in Brazil. We do not
purport to offer a comprehensive exposition of the matter, but only to
clarify the main characteristics of this kind of operation. In the past, lease operations
in Brazil were understood – and are still considered by less specialized
scholars and judges – as similar to a rental agreement combined with a
purchase option. However, at least from a juridical standpoint, the resemblance
is quite slight. Lease agreements (which can be divided into two major groups: financial
leasing and operating leasing transactions), clearly are financial transactions
in the Brazilian legal system. In Brazil, only leasing companies (ultimately
similar to financial institutions and subject to the majority of laws
and rules applicable to banks) and some expressly authorized financial
institutions are allowed to execute lease agreements as lessors. On the other hand, rental agreements can be executed by non–financial companies
or even individuals, such agreements being regulated by Articles 1188
to 1199 of the Brazilian Civil Code and general rules applicable to non-financial
agreements (on January 11, 2003, a new Civil Code will become effective
and this will lead to some alterations to the rental agreements executed
from that date on). Such general rules also apply to agreements that combine
a rental operation and a purchase option, which should always be understood
as two different agreements coexisting in the same negotiation. There
is no law in Brazil specifically mentioning rental agreements with purchase
options. In case of lease agreements,
however, there is not only a law (No. 6099/74), but a number of resolutions
from the National Monetary Board (“Conselho Monetário Nacional – CMN”)
and directives from the Central Bank of Brazil (“Banco Central do Brasil
– BACEN”), ruling in a very detailed manner on such transactions’ (and
respective agreements) characteristics and on requirements to be a leasing
company. Both financial and operating
leasing consist of two indissoluble phases, which we will call Phase A
and Phase B. Phase A consists of the financing phase of a lease
transaction (both financial and operating leases), where resources employed
by the leasing company to purchase the asset chosen by the lessee are
recovered, in full or in part, together with operational costs and lessor’s
remuneration (basically interest), by means of installments to be paid
by the lessee (in financial leasing transactions, Phase A may involve
up to 100% of the asset’s purchase price; in operating leasing, this is
limited to 90%). After the enactment of a directive
by BACEN in May 2001 (“Circular no. 3036/01”), there is no longer a specific
regulation determining how the installments in a lease agreement should
be calculated. Therefore, parties may freely agree on the value of the
respective installments, including providing for “balloon payment” provisions.
Notwithstanding, the general limits applicable to financial or operating
leases, as the case may be, are still in force and shall be observed in
the calculation of balloon payments, for example. Following Phase A, the lessee
is entitled to purchase the asset, return it or renew the lease. In case
the lessee decides to purchase the asset, it must pay the amount stipulated
as a purchase option. Such amount, in operating leases, is the market
value of the asset at the time Phase B takes place. In financial leases,
the purchase price can be freely stipulated by the parties (even a symbolic
price is allowed). Also, exclusively in financial leases, parties may
stipulate a guaranteed residual value (“valor residual garantido – VRG”),
which, according to CMN Resolution No. 2309/96 can be paid by the lessee
at any time of the agreement, such payment, if in advance, not being taken
as an acceleration of lessee’s choice in Phase B (however, such authorization
from the CMN is continuously being challenged by lessees in court). The VRG acts as a guarantee
to the lessor that it will recover the full amount invested in the purchase
of the leased asset, no matter what the lessee’s choice in Phase B. Thus,
for instance, in case the lessee decides to purchase the asset, the lessee
will pay the VRG. In case the lessee decides to return the asset, the
lessor can sell it and if the proceeds from the sale are not sufficient
to cover the amount stipulated (as the VRG), the lessee must pay the difference.
Otherwise, if the proceeds from the sale exceed the VRG, the lessor will
credit the difference to the lessee’s benefit. Rental agreements do not involve
financing (at least in a disclosed manner); the renter pays a rent to
the rentor for the possession of the asset. This rent can be compared
to the interest that a borrower owes to a lender in a loan agreement. Hence, from a legal standpoint,
the nature of the payments in lease agreements and rental agreements is
clearly different. Same is applicable to the purchase option (VRG included)
typical in lease agreements and the purchase option that may be inserted
in a rental agreement. The latter has no connection to financing of any
kind (again from a legal standpoint) and the price may be stipulated according
to both parties’ decision (fair market value, for instance). In addition, according to Brazilian law, in lease transactions (except
for the sub-lessor situation in sublease operations), title of the asset
remains with the lessor until Phase B (and will continue to be held by
the lessor in case the lessee decides to return the asset or renew the
lease). In rental agreements, on the other hand, rentor is not required
to hold the title of the asset. Both types of transactions
are essentially non-cancelable (such characteristic may be weakened in
case a court accepts the applicability of the Brazilian Consumer Protection
Code provisions, but such discussions go beyond the purposes of this text)
but can be terminated in case of default by one of the parties. Lessor cannot be forced by
lessee to receive the leased assets back prior to Phase B. Thus, lessee
must comply with all its obligations under Phase A (basically, payment
of the lease installments), to exercise such right. Same is applicable
to rental agreements executed under the Civil Code in force at the present
time. Renter, to return the assets to rentor prior to the end of the rental
agreement’s term shall pay all rental installments (including those yet
to become due). However, regarding those rental transactions executed
on and after January 11, 2003 (when the Brazilian new Civil Code will
come into force), renter will be able to return the assets prior to the
end of the term of the rental agreement without paying the remaining rental
installments in full, but solely a fine or an indemnification regarded
as fair (the new Civil Code does not provide specific parameters for such
fine/indemnification, leaving room for litigation). Leasing companies, in our
opinion, are not subject to restrictions on interest rates (except for
interest in arrears, which is limited to 12% per year, in our understanding).
Rental agreements do not include interest rates (except for interest in
arrears, also limited to 12% per year). Leasing companies shall charge
lessees differences in exchange rates between, for instance, US Dollars
and Brazilian currency in case the funds to purchase the leased asset
were obtained from foreign investors (however, dollar denominated transactions
are strictly forbidden, except for cross-border ones). Comprehensive evidence
of such origin must be provided by the leasing company for such purpose,
due to a number of decisions rendered by the Brazilian Superior Court
of Justice (STJ) since the beginning of the previous decade. Actually, all recent STJ decisions
involving such controversy, state that an exchange rate adjustment can
only prevail in case lessor provides evidence of the specific fund raising
in foreign currency. Hence, in our opinion, the risk involving dollar-indexed lease agreements
in which the lessor is not able to clearly demonstrate the origin of the
funds used to purchase the leased asset, is high. In this case the courts
usually decide to substitute the dollar exchange rate clause by a domestic
monetary correction factor (which deals with inflation, instead of exchange
rate float). Facility agreements, in which the disbursements are requested
by the lessor (as borrower) based on a list of the lease agreements executed
or about to be executed, in our opinion, shall reduce the risks. On the other hand, rental
transactions, in Brazil, cannot be dollar-indexed (nor dollar denominated),
for example, except when one of the parties is domiciled abroad and the
agreement is duly registered with BACEN. Leasing companies are authorized
to assign their lease receivables to other leasing companies in Brazil,
or other financial institutions and/or special purpose companies expressly
authorized by the CMN, or to foreign entities of any kind (subject to
BACEN approval). In this case, assignments are strictly non-recourse:
the liability of the leasing company (assignor) is limited to the existence
of the assigned credit. Rental companies may assign their credits in rental
agreements, but a full recourse may be demanded by the assignee. Besides being entitled to
assign to other leasing companies or financial institutions their receivables
resulting from lease agreements (in which case the leasing company/assignor
would remain as the lessor in the respective lease agreement, continuing
to hold the title of the leased assets until the lessee, after settling
all lease installments, chooses to purchase same), leasing companies are
also entitled to assign lease agreements as a whole. A leasing company
cannot transfer the title of assets leased in an ongoing lease agreement
(except in case the entire transaction is assigned). Otherwise, such agreement
may be disregarded as a lease, by the tax authorities and/or the lessee
and/or the Courts. Rental agreements are not
subject to such restrictions, and, in our opinion, a rental company may
transfer the title of the assets to third parties during the term of an
ongoing rental agreement, and/or assign the rental receivables or assign
the entire rental agreement. Both lease and rental agreements
can involve a purchase option of the asset to the benefit of third parties.
However, such option must be stipulated in a separate document, subject
to the right of first refusal of the lessee in case of leasing agreements
(Phase B). In the case of rental agreements, such right of first refusal
of the renter depends on the existence of a purchase option combined with
the rental. Usually, such purchase option granted to third parties takes
place also if the lease or rental company terminates the agreement as
a result of lessee/renter default: the purchase price adjusted in the
third party (which usually is the manufacturer of asset or the investor
that provided lessor or rentor with the funding to execute the lease or
rental agreement) may correspond to the outstanding balance of the lease
or rental agreement. There is a risk in rental
agreements that is not applicable to lease transactions: being the rentor
in a rental agreement, the owner of the asset, same may be considered
as jointly and severally liable to renter for damages caused by asset
misuse by the renter to third parties. There is an old consolidated opinion
(stare decisis) in the Brazilian Supreme Court (STF) upholding such
joint liability, in case of automobile rental companies (“Súmula 492”).
In the past, the courts used to extend such consolidated opinion to lease
agreements, but at the end of 1980s such trend was fully reversed, based
on the assumption that the leasing company has no effective “animus domini”
over the asset, which was purchased and delivered according to lessee’s
instructions, to be used by the lessee. Furthermore, stemming from the
very essence of the leasing (in Brazil) is the right of the lessee to
purchase the asset at the end of the lease (Phase B) and that any provision
in the agreement which is not in harmony with Law no. 6099/74 provisions
will result in the disregard of the transaction as a leasing and consequently,
being considered as an installment purchase (in which, again, the “animus
domini”, i.e. the intention of the owner to continue to hold the title
to the asset is slight). In case of rental agreements providing for a
purchase option, such grounds for exemption of the joint liability may
be applicable, in our opinion, but the risk exists. These are the main differences
between lease and rental agreements. There are additional differences
between operating and financial leases, as follows, which are not applicable
to rental agreements: Financial Lease ·
Minimum lease term of (a) 02 years for assets with useful lives of 05 years
or less, and (b) 03 years for assets with longer useful lives; ·
Expenses for maintenance, technical assistance and operating services are
normally under the responsibility of the lessee. Operating Lease ·
Minimum lease term of 90 days. Maximum lease term cannot be more that 75%
of the useful life of the asset; ·
Expenses for maintenance, technical assistance and operating services can
be under the responsibility of the lessee or the lessor. José Augusto Leal |