Financial Leasing Agreement

Definition and Purpose of Financial Leasing

Financial Leasing, commonly known as "Leasing" in global commerce, is a medium-term financing method utilized by businesses during their establishment phase or expansion periods. Instead of using their own capital or securing bank loans to acquire necessary machinery, vehicles, or real estate, investors turn to financial leasing.

Under Turkish Law, specifically the Financial Leasing, Factoring and Financing Companies Act No. 6361 (FFFK), a financial leasing agreement is formed when a legally authorized leasing company (lessor), at the request of the lessee, purchases an asset and leaves its possession and all related benefits to the lessee in exchange for a lease payment. The primary purpose is to provide financing. The lessee enjoys the economic ownership and use of the asset, while the legal ownership remains with the lessor until a potential purchase option is exercised at the end of the contract.

Subject Matter of Financial Leasing

Not everything can be leased under a financial leasing agreement. The FFFK specifically outlines the permissible assets:

• Movable Assets (Taşınır Mallar): Equipment, machinery, commercial vehicles, sea and air vessels, and medical devices are typical examples. These assets must maintain their essential characteristics after the lease term and should not be consumable goods.
• Immovable Assets (Taşınmaz Mallar): Commercial real estate, factory buildings, and parking lots can be subjects of financial leasing. The law also permits the leasing of long-term or perpetual servitudes registered in the land registry.
• Computer Software: The law permits reproduced copies of computer software to be financially leased, which provides significant financing advantages for IT and design companies relying on high-cost software.

Legal Characteristics and Formal Requirements

The Financial Leasing Agreement is an innominate contract in general civil law but a nominate (isimli) contract under the specific FFFK legislation. It is a bilateral (synallagmatic), onerous, consensual, and continuous contract.

Formal Requirements: Unlike standard lease agreements which have no formal requirements, financial leasing agreements must be made in written form. Furthermore:

• If the asset is immovable, the agreement must be annotated in the Land Registry (Tapu Sicili).
• If the asset is a registered movable (like an aircraft or a ship), it must be registered in its special registry.
• For unregistered movable assets, the contract must be registered in a special registry kept by the Association of Financial Leasing, Factoring and Financing Companies.

Obligations of the Leasing Company (Lessor)

The lessor, restricted strictly to authorized financial leasing companies, participation banks, and investment banks, bears several critical obligations:

• Purchasing the Asset: The lessor must purchase or acquire the exact asset requested by the lessee from a third-party seller.
• Delivery of Possession: The lessor must ensure the asset is delivered to the lessee. Without delivery, the lessee's obligation to pay the lease installments does not begin.
• Refraining from Interference: The lessor must not hinder the lessee's use of the asset. The lessee holds the economic rights to benefit from the asset fully.
• Non-Transferability: The lessor generally cannot transfer the ownership of the asset to a third party to protect the lessee's rights, except to another financial leasing company under strict conditions.

Obligations of the Lessee

The lessee assumes significant responsibilities due to the economic ownership and financing nature of the transaction:

• Payment of Lease Installments: The most fundamental duty is paying the agreed financial leasing bedeli (rent). Failure to do so leads to strict default consequences.
• Care and Maintenance: The lessee must use the asset with the care of a prudent businessperson and is financially responsible for all routine and extraordinary maintenance and repairs.
• Insurance Premiums: The leased asset must be insured. Regardless of who arranges the policy, the legal obligation to pay the insurance premiums falls squarely on the lessee.
• Bearing the Risk of Loss: If the asset is damaged or destroyed without the lessor's fault, the lessee remains liable for the lease payments. The risk passes to the lessee upon delivery.
• Return of the Asset: If the contract ends and the lessee does not or cannot exercise the right to purchase the asset, they must return the asset to the lessor in its original condition, accounting for normal wear and tear.

Termination of the Financial Leasing Agreement

Financial leasing agreements can terminate through ordinary or extraordinary means:

• Ordinary Termination: The agreement ends naturally upon the expiration of the lease term. Other ordinary causes include the bankruptcy, death, or loss of legal capacity of the lessee, or the liquidation of the lessee's enterprise, because the agreement is highly dependent on the lessee's personal and financial reliability.
• Extraordinary Termination (Default): If the lessee fails to pay the lease installments, the lessor must issue a formal warning granting a 30-day grace period. If the contract stipulates that ownership will transfer to the lessee at the end of the term, this grace period must be at least 60 days. If the lessee fails to pay three installments (or two consecutive ones) within a year, the lessor can terminate the agreement immediately.
• Just Cause: The agreement can be terminated if continuous breaches (e.g., failure to maintain the asset, illegal subleasing) make the continuation of the contract unbearable for the innocent party.