Legal Environment

With the recent Equipment Leasing Act 2015, Nigeria now joins countries with specific legislation on leasing. The Equipment Leasing Act is essentially aimed at promoting the business of leasing in Nigeria by among other things, creating clarity, certainty and sanity in the practice of leasing and ensuring protective mechanism, for both the lessor and lessee. The new Act will no doubt change the landscape of leasing in Nigeria and provides essential ingredients for the legal aspect of leasing.

Most of the provisions of the Act reflect the general principles of the common law (received law from Britain and applicable in commonwealth countries) being given more effects through statutory provisions. Essentially, the practice of leasing will now be governed by the Act and general principles of Common Law together with some other laws such as Companies Income Tax Act (as amended) Capital Gain Tax Act Cap 42 Laws of the Federation of Nigerian 1990,  Value Added Tax Act, with provisions that impact leasing.

Definition of an Equipment Lease

A lease may be described as a contract between the owner of an asset (the lessor) and a second party (the lessee), whereby the second party is granted the possession and use of the asset over an agreed period of time and for a stipulated consideration. A lease therefore, is a usage agreement and does not confer title of ownership on the lessee.

According to S.(44) of The Equipment Leasing Act 2015, a lease agreement “means a written agreement between the lessor and the lessee for the lessee’s use in consideration of the payment of an agreed rental over a specified period” for an equipment and “the lessor shall retain full title and legal ownership during the specified period of the lease.

This is in contrast to similar transactions, such as hire purchase and conditional sale, in which the intention of both parties, is that the equipment passes to the “purchaser” on fulfillment of certain conditions stated in the agreement. In leasing, the lessor retains ownership of the leased asset while the lessee is vested only with the possession and right to use the asset for a specified period on payment of agreed rentals.  Thus, the asset is not and ordinarily cannot become the property of the lessee.

Equipment leasing could also be regarded as a bailment for hire which has been defined by the court “as possession coupled with the right to use a particular property in return for a price or remuneration to be paid by the bailor”.

Equipment Lease/Bailment

Since the features of equipment lease are in tandem with those of a bailment, by the preponderance of judicial authorities on the definition of the two terms, it may be safe to describe equipment leasing as a form of bailment.

It therefore suffices that any transaction which purports to be an equipment lease should essentially possess the following elements of the transaction which the law regarded as bailment to wit”.

The subject matter must be a chattel

The possession of the chattel must be capable of transfer from one party to the other and must be actually transferred.

The custody of the chattel must be the object of the transfer of possession and

The transfer of custody must be temporary and not permanent.

Distinction between Equipment Leasing and other related forms of Equipment Financing

1. Hire Purchase

A hire purchase is a contract by which goods are delivered to a person, who agrees to make periodical payments by way of hire, with an option of buying the goods after the stated hire instalments have been paid. The goods may be returned to the owner at any time before the option is exercised on payment of the sum stated in the contract.  Until the option is exercised, there is no agreement to buy or sell the goods.

Section 20 of the Hire Purchase Act Cap 169, defines Hire Purchase as “the bailment of goods in pursuance of an agreement under which the bailee may buy the goods or under which the property in the goods will or may pass to the bailee”.

Also, the Equipment Leasing Act 2015 tends to re-echoed this position. Section, 4(1)(f) of the Act makes it obligatory on the lessee to return the asset at the end of the lease unless the  lease is renewed or the lessor decides to sell the asset to the lessee. By implication, the lessee is not given the option to purchase as in hire purchase rather, the disposal of the asset is at discretion of the lessor as the owner of the asset.

Conditional Sale

This is a transaction under which the Purchaser agrees to buy and take possession of the goods, but is not to become owner of them until all the instalments have been paid. A conditional Sale Agreement differs from Hire Purchase Agreement in that the party taking the goods has not merely an option to purchase but binding obligation to do so. However, the buyer’s proprietary interest is subject to the fulfillment of all the conditions for the transfer.

Here the property in the goods passes at once but with a personal obligation to pay instalment and by this reason there is an absolute contract of sale and the buyer can pass a good title to a third party – Section 25 of the Sale of Goods Act.

The buyer is under obligation to buy.


Some of the risks confronting lessors are as follows:

a. Default by the Lessee

b. Loss of leased item

c. Maintenance and Repair of leased item

d. Third party interest i.e. Bonafide Purchaser without Notice

e. Annexation of leased equipment to real property

f. Risk of Penalty Clause.

g. Insolvency and Bankruptcy of the lessee


Like other forms of contractual agreements certain documents are usually required in a lease transaction.  These documents include:

a. Proposals

b. Lease Application

c. Commitment Letters

d. Credit Applications

e. Lease Agreement

f. Certificate of Delivery and Acceptance

g. Landlord/Creditor waiver

There is usually a proposal by a prospective lessee to a lessor through the instrument of a Lease Application, for the lease of a particular unit or item of equipment in which the lessor is dealing, stating the location of equipment, the possible cost or purchase price, the brand of manufacture and the intended duration of the lease.

The prospective lessee is thereafter invited for discussion and negotiation of terms by the parties during which period commitment letters are issued and exchanged between parties.  At this point, there is a mutual agreement of an offer and acceptance by the parties.

The negotiation proposal and all other steps culminating in a lease agreement between the lessor and the lessee, are essentially and basically credit application by the lessee and lessor.  A Lawyer is thereafter invited to prepare an equipment lease agreement embodying, all the conditions and warranties already agreed to by the parties and also ensuring that the essential interest of both parties is adequately protected.

The draft lease agreement is thereafter sent to the two parties for verification.  If there is no error spotted for correction, the final copies will be prepared for execution by the parties.

Apart from the foregoing, a lease agreement may be supported by the following documents

  • Guarantee and Indemnity Agreement
  • Contract of sale used in the “Sale” and lease back transactions to transfer ownership from the prospective lessee to the lessor.
  • Purchase agreement assignment to the lessor where the lessee entered into direct purchase agreement with the vendor.

Lease Agreement Provisions

Lease Agreements contain a number of terms and conditions in common, although the treatment of a particular issue may vary widely from document to document. Section 4(1) of The Equipment Leasing Act, makes provision for the contents of a lease agreement before it is registered. The contents as specified and other relevant provisions that govern relationship in the Act are part of the discussion below and certainly not conclusive of all terms and conditions in a lease agreement as the parties are free to contract to reflect their intentions .  Some of the express terms usually included in a lease agreement include:

(a)      Commencement – the introductory part that describes the parties to the agreement i.e. the lessor and the lessee.

b)       Identification of the parties – the parties to the lease transaction, their legal status and address must be mentioned to sufficiently identify them,

(c)      Term (Period) of the lease – the period the lessor has agreed to let to the lessee the equipment described in the schedule to the agreement as well as the commencing date of the lease.

(d)      Description of the Equipment -the asset must be described sufficiently to be able to identify the asset leased. If it is a car for instance, the chassis and engine numbers must be included in the description.

(e)      Delivery – The lessee warrants to the lessor that the lessee has exclusively used his own knowledge and expertise to choose the equipment and has taken all care and attention to ensure that the equipment is suitable for his needs and has satisfied himself that the equipment is fit for the purpose for which it is intended to be used.

The lessor also appoints the lessee as his agent to accept delivery of the equipment from the supplier. The lessee’s acceptance of delivery of the equipment from the supplier shall constitute conclusive evidence that the lessee is satisfied with the equipment.

(f)       Operative part – the letting i.e., the lessor lets and the lessee takes goods (specify) on a lease for the Rental periods.

(g)      Rental – Stipulates the lessee’s agreement to pay rentals to the lessor over the lease period and the method of calculating such rentals. This term may also contain a clause allowing the lessor the right to vary the rentals with changes in the cost of funds.

The lessee’s obligation to pay rental is absolute

The lessee could also be permitted by a clause to offset stipulated period but a provision is usually inserted for the lessee to pay penalty on the prepaid amount. This is to ensure that the lessor recoups all its capital cost and capital expectation as already calculated over the entire lease period.

There is also a clause for punctual payment of the lease rentals by the lessee with interest charged on the overdue rentals.

(h)      Title and Assignment

(a)      Title in the equipment vests with the lessor while the lessee only has or is granted possession                   right.

(b)      The lessor has the right to assign his interest in the agreement and the equipment whether                       absolutely or by way of charge and whether whole or in part to any person.

(i)       Covenants by the Lessee  – Obligations covenanted to be observed by the Lessee to protect                 the Leased Equipment will include:

Use of the Equipment

  • Not to assign, let, sub let, mortgage, charge or hold himself out as the owner nor create or allow to be created any lien or encumbrance on the leased equipment without the lessor’s written consent.
  • Not to sell the leased equipment or offer it for sale.
  • Not to permanently affix the equipment to the land so that it can be detached easily without any damage to the equipment or the land.
  • To obtain all licences necessary for the use of the equipment and to pay punctually all rates, and taxes, charges and impositions payable either in respect of the premises where the equipment is situated or on the equipment itself.
  • To use the equipment only for the purposes for which it is intended and to store it properly and prevent it from exposure to damage or disrepair.
  • Not to cause or permit the equipment to be removed from the premises indicated in the schedule to the agreement without the prior written consent of the lessor.

(j).   Maintenance

A lease agreement usually contains a clause known as Maintenance & Repair clause which makes it obligatory for the lessee to maintain a leased equipment and keep it from damage.  By this clause, the Lessee is expected to take adequate care of the asset, use in a manner that will not damage it because the value of the residual (value of asset after the lease contract) depends on it being properly maintained, it is therefore essential for the lessee to keep the equipment in good and serviceable condition. This is done by replacing all missing or damaged broken parts with spare parts of equal value and qualityFailure or refusal of the lessee to do this, could be interpreted as a breach of contract which could constitute a good ground for a legal challenge.

Furthermore, the nature and character of each asset like the operating condition especially with regard to temperature; humidity and general handling methods, should be clearly spelt out in the contract.  The Lessee should ensure that he understands the requirements before signing the contract because after appending his signature, he is under obligation to abide by the agreed operating or handling method of the asset.  Failure to do so could give the equipment supplier an excuse to dishonour the terms of the warranty attached to the asset. The Lessor should regularly inspect the leased asset to ensure compliance with the terms or obligations of the contract. In the face of constant breach of the contract, the lessor can cancel the lease agreement leaving the lessee to bear the penalty of default.

It is generally the duty of the lessee to:

  1. Maintain the equipment in good working condition and repair (fair wear and tear which shall be the burden of the lessor excepted)
  2. Ensure that it is kept safe in accordance with statutory requirements and without risk to health.
  3. Observe all the manufacturers and/or suppliers instructions relating to its use and operation.

(k)      Insurance

It is common practice for the lessor to insure the asset as the owner and at the expense of the lessee to guide against sharp practices from the lessee. The Equipment Leasing Act requires the mutual consent of the parties as to the choice of the insurer.

(l)       Identification – The Lessee shall affix to and maintain upon the equipment such plates or identifications marks, showing that the equipment is the property of the lessor or as the lessor shall require.

(m)     Termination on Default – contains list of such events the occurrence of which will entitle the lessor to treat the lease as repudiated by the lessee.

(n)      Minimum Payment Clause – This is a default and termination clause incorporating a provision for minimum payments or liquidated damages, where the lessor, upon default, determines the lease by adequate notice. The court might not be willing to enforce such a provision if it amounts to a penalty, that is, if it exceeds the actual damages suffered by the lessor as a result of the breach and premature termination.

(o) . Rights and Obligations of the Lessor

1. Right of Asset Inspection

In equipment leasing transactions, the practice is not that a lessor will lease equipment and after the execution of relevant documents, sits back and expect the rental payments.  As a matter of fact, the lease agreement should contain a provision giving the lessor a right to inspect the equipment on regular basis.  This is necessary to avail the lessor the opportunity of not only to see the condition of the equipment but also its security.  It also affords the lessor ample opportunity to offer suggestions and/or directive on the maintenance of the equipment to improve its life span.

Furthermore, such inspection is also helpful to the lessor to ensure that the equipment is not taken out of the contracted location without his consent.  It also helps to keep tap on the financial well being of the lessee.  This is necessary so that any slightest indication of insolvency, will alert the lessor to take immediate steps to recover the leased equipment from the lessee before a receiver is appointed. In essence constant, monitoring of the state of the equipment from time to time is very important as part of strategy to ensure a smooth lease transaction.

2. Right of  Inspection of Lessee’s Accounts and Documentation

Apart from the right of the lessor to inspect the leased equipment, it is also desirous and in fact the practice to insert in the lease agreement, a right of the lessor to inspect the lessee’s account from time to time. Usually, most leases contain a provision to the effect that the lessee shall furnish to the lessor audited annual statements of account within a specific period of say, 120 days, after each auditing period.

There may also be a provision for the lessor to be furnished with the lessee’s quarterly statement of accounts as well as other relevant documents.  This is very important to enable the lessor gauge, on regular basis, the financial state of the lessee and determine if the lessee is capable of making payment of rentals and sustaining the transaction.

Furthermore, there could be a standing instruction to the lessee’s bankers to accord the assistance that may be needed to assure the lessor, of the lessee’s continued capability to retain the leased equipment.

The following are some of the information/documents necessary for the lessor to monitor the progress of leased equipment:

  • Basic information pertaining to the leased equipment, its purposes, other equipment to be used along with it and possibility of fixation in a real property.
  • Financial information like audited accounts, cash flow projections, management accounts etc.
  • Corporate information with respect to Memorandum and Articles of Association, changes in directors, mergers, acquisition, restructuring and ownership of the lessee
  • General information relating to major customers, suppliers, auditors and other consultants.

(p)    Lessor’s Liability/Indemnity Clauses

One of the component parts of a lease agreement relates to the issue of the lessor’s liability and indemnity clauses.

Generally, a lessor should normally be protected from liability arising out of or in connection with leased equipment after the commencement and during the continuance of the lease. .

The lessor’s liability in a lease transaction could be viewed from three perspectives namely:

i. Condition of title: the lessor who is the owner of the equipment is said in law to give an assurance that he has title to the equipment. As a rule, the lessor must have the equipment at the time they are delivered to the lessee.

ii. Implied warranty of fitness: the owner who lets out a chattel on lease must take reasonable care to see that it is in reasonably fit for the purpose for which it was let. However, it is possible for the lessor to exclude totally all implied terms concerning quality or fitness of the equipment.  Such a clause in the lease document is effective to exclude the common law implied terms only so far as it satisfies the test of reasonableness.  In the context of a transaction in which the lessee relies essentially on his own skill, such an exemption clause would be seen to be prima facie reasonable. The Equipment Leasing Act expressly excludes the lessor from liability in this situation.

iii. Quiet and peaceful enjoyment: As long the lessee abides by the term of the lease agreement, there is also an obligation on the lessor to grant the lessee a quiet and peaceful enjoyment, and in the case of operating lease, if provided for to maintain the equipment, by making sure that it is in good working condition.

(q) Choice of law

The choice of law governing the transaction of equipment leasing will depend on Lexi loci situ, that is, the law of the place where the contract is entered or where the action, which constitutes the breach, occurred. A civil action could also be instituted where the defendant resides so as to make it reasonably easy and accessible for him to defend the action.

Nevertheless, it may be necessary and even expedient to suggest here the inclusion of arbitration clause in equipment leasing.  .

The parties are free to agree to the choice of law of a particular jurisdiction from

i.  Location of the lessor

ii. Location of the lessee

iii.Location of the equipment or where the contract was entered into.

(r) Arbitration

Arbitration has become increasingly popular in an effort to reduce the high costs and long delay of litigation. Thus, if arbitration is desired for a particular transaction, an arbitration clause should be included in the lease. Such a clause usually specifies that arbitration is the means of resolving transactions disputes. It also states the number of arbitrators to be appointed, methodology for selecting and qualifying arbitrators etc. It is also a settled principle of law that where an agreement made and signed by the parties stipulates that any dispute arising there from must first be referred to a referee (i.e. an arbitration), it would amount to “jumping the queue” or “putting the cart before the horse” for any of the parties to resolve to go to court first, before the dispute between the parties is referred to arbitration as provided in the agreement to which the parties are mutually bound.

All over the world, emphasis now is on Alternative Dispute Resolution. The relevant law in Nigeria is the Arbitration and Conciliation Act, Cap 19, Laws of the Federation of Nigeria, 1990.

(s)  Other terms:

i. Equipment schedule

ii. Upgrade Option – right to exchange, upgrade or alter the equipment.

iii. Renewal option – terms & conditions, rights & responsibilities

iv. Return provisions

v. Sublease

vi. Landlord/Mortgagee Waiver – in case of the need to remove the equipment

vii.Corporate Resolution/Partnership Certificates.