ATTY.

WAR’S BATTLE NOTES IN COMMERCIAL LAW

FINANCIAL LEASING

FINANCIAL LEASING (FINANCE LEASE)

– a mode of extending credit through a non-cancelable lease contract under

which the lessor purchases or acquires, at the instance of the lessee, the
machineries, equipment, motor vehicles, appliances, business and office machines,
and other movable and immovable property, in consideration of periodic payment by
the lessee.

 The periodic payments to be made by the lessee must be enough to

amortize at least 70% of the purchase price of the machineries, equipment,
etc.

 The period of the least must not be less than two (2) years.

o The main law covering financial leasing is RA 8556, as amended, or the

“Financing Company Act of 1998”.

o The financial leasing companies (leasing companies) are essentially “financing

companies” that are primarily organized for the purpose of extending credit
facilities to consumers and to industrial, commercial, or agricultural enterprises.

o The credit facilities extended by these financing companies are:

a. Direct lending;
b. Discounting1 or factoring2 of commercial papers or accounts receivables;
c. Buying and selling contracts, leases, chattel mortgages, or other
evidences of indebtedness;
d. Financial leasing of movable and immovable properties.

o These financing companies are regulated by the SEC and, if a subsidiary of a

bank or if granted with quasi-banking license, by the BSP.

FINANCIAL LEASE VS. LOAN

1
Discounting – type of receivables financing whereby evidences of indebtedness of a third party (like
installment contracts, promissory notes, etc.) are purchased by, or assigned to, a financing company in an
amount or for a consideration less than their face value.
2
Factoring – type of receivables financing whereby open accounts, not evidenced by written promise to pay
supported by documents (like invoices of manufacturers and suppliers, delivery receipts, etc.) are purchased
by, or assigned to, a financing company in an amount or for a consideration less than the outstanding balance
of the open accounts .

1
  FINANCIAL LEASING is an arrangement whereby the lessor grants the
use of an asset to the lessee for a fee for a specified period of time. LOAN
(mortgage loan), on the other hand, is the acquisition of an asset through
mortgage of collateral or of the same asset.

 Finance lease is used to finance the USE of an equipment while loan is

used to finance the PURCHASE of an equipment.

 Ownership of the leased equipment remains with the lessor but at the end
of the term, the lessee may purchase the same from the lessor. Loan, on
the other hand, gives the client the ownership of the asset which he
amortizes for the entire amount financed.

CIVIL LAW LEASE VS. FINANCIAL LEASE

The provisions on Lease found in the Civil Code (Title VIII, Arts. 1642
onwards) are the general law covering ordinary leases.

RA 8556, as amended, or the Finance Company Act is a special law

covering financial leasing. As a special law, financial leasing may be seen to be
contract sui generis, possessing some but not necessarily all of the elements of an
ordinary or civil law lease.3

TWO (2) KINDS OF LEASING ARRANGEMENTS:

1) Direct Lease Arrangement – a standard arrangement that allows lease of

equipment for a set of term.

EQUIPMENT VENDOR/SUPPLIER

(1) SELLS THE EQUIP (2) PAYS EQUIP

FINANCE COMPANY
(LESSOR)

(3) LEASES EQUIP (4) PAYS MO. LEASE

PAYMENTS

CLIENT
(LESSEE)
3
Beltran vs. PAIC Finance Corp., GR 83113, 19 May 1992

2
 2) Sale and Leaseback Arrangement – ideal for those businesses with existing
equipment but would like to earn additional working capital for their
businesses and still want to use the said equipment.

(1) SELLS EQUIPMENT

(2) PAYS FOR THE SALE

FINANCE
CLIENT
COMPANY
(LESSEE)
(LESSOR)
(3) LEASES EQUIPMENT

(4) PAYS MO. LEASE PAYMENTS

Simulated Finance Lease?

– Read the case of PCI Leasing vs. Giraffe-X Creative Images, GR 142618, 12 July 2007

NATURE OF RIGHT OVER THE PROPERTY

Legal title to the equipment leased is lodged in the financial lessor. The
financial lessee is entitled to the possession and use of the leased equipment.

LIABILITY OF THE LESSOR

Under Sec. 12 of RA 8556 provides that financing companies shall not be

liable for loss, damage or injury caused by a motor vehicle, aircraft, vessel,
equipment, machineries, etc. leased to a 3 rd person or entity except when the said
leased asset is operated by the financing company, its employees or agents at the
time of the loss, damage or injury.

3
 The financing company is liable under the registered owner rule4 if the
lessee or the latter’s employee caused damage or injury in the negligent operation of
the leased vehicle if the financial lease is not registered. 5

Remedy of the Lessor? The remedy of the financing companies if they are
being made liable under the registered owner rule is to resort to third party
complaints against the lessees or whoever are the actual operators of the vehicles.

For additional information, read the cases of:

1. First Malayan Leasing vs. Court of Appeals, GR 91378, 09 June 1992;

2. BA Finance vs. Court of Appeals, GR 98275, 13 November 1992;
3. PCI Leasing vs. UCPB General Insurance, GR 162267, 04 July 2008;
4. FEB Leasing vs. Spouses Baylon, GR 181398, 29 June 2011

REGISTRY OF FINANCIAL LEASE

The Registry of Deeds (RD) shall open and maintain a register of financial leases as
an adjunct to the chattel mortgage registry (Sec. 13, RA 8556).

4
Concept in Transportation Law that states that the registered owner of a motor vehicle whose operation
causes damage or injury to another is liable to the latter.
5
PCI Leasing vs. UCPB General Insurance, GR 162267, 07/04/2008