Equity contribution and purchase options are common features in lease transactions, In case of equity contribution the intention mainly, is to get the commitment of the lessee while for purchase option is to achieve the true intention in finance lease of the lessee becoming owner of the asset at the end of the lease. Many transactions have scaled through without any issue relating to these.
However, the sore point will manifest when there are disputes especially on repossession. Equity contribution and purchase option connote proprietary interest on the lessee. By its legal nature, leasing does not envisage proprietary right on the lessee during the entire duration of the lease, the lessor remains owner of the leased asset (see section 44, Equipment leasing Act 2015).
This ownership status confers on the lessor the right to repossess the asset in the event of default. Therefore, inserting equity contribution in your documentations for instance, implies joint ownership and in the event of default, it is doubtful if you as the lessor will be allowed to exercise the right of repossession, since the asset does not solely belong to you. This is even made worst in some cases where the purchase receipt or title document is written in the name of the lessor and lessee.
Similarly, a purchase option clause will take the transaction outside the purview of leasing to hire purchase and the lessor cannot repossess without the court, if the lessee has paid 2/3 of the rentals. Consequently, it is imperative to avoid such clauses. The intentions behind the practice can still be achieved without jeopardising the transaction, by taking advance rentals instead of equity contribution which will increase the yield on the transaction and mitigate tenor risk.
For purchase option, the lessor can rely on the provision of the Section 4 ELA 2015, by inserting a clause in the agreement that would enable the asset to be owned by the lessee without giving purchase option.
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