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Lease Transfer

28.04.2020 Written by Tanushev

A lease transfer, or lease swap, is a transaction in which one lessee transfers to another the right to use the leased asset along with the obligation to pay the remaining lease payments. The new lessee /acquirer/ accepts the terms of the lease, the remaining monthly installments, additional payments, and any residual value.

Due to the specific nature of the various types of equipment that can be leased, most frequently the lease transfer is used for cars.

Why do we make lease transfers?

The lease transfer is usually initiated by the lessee under a lease. At the conclusion of the lease, each lessee assesses the need for the lease car and the ability to pay all lease payments in the future. Accordingly, the reasons for a lease transfer can be two main types:

  • Termination of the need for the leased car

An example for this is a company, which has leased 10 vehicles for the needs of its sales employees. One year after the start of the lease term, the company cuts 50% of its sales staff due to a market slump. Accordingly, 5 of the leasing vehicles are no longer needed to service the business. If the company continues to lease the five unnecessary vehicles, it incurs costs for assets it does not use. The most reasonable solution for the company is to look for potential clients for lease transfers.

Ending the need for a leasing asset may not be so dramatic, but simply the desire of the original lessee to upgrade the leased vehicle with a newer model.

  • Difficulties or inability to meet the lease payments

The cash flow on which the lessee relied to meet the lease installments at the time of closing the leasing contract may be impaired. Redundancies, business stoppages, revenue decreases are all reasons that can make it difficult for a lessee to pay their lease payments. The best solution again is a lease transfer.

How is a lease transfer done?

First, the original lessee must verify that his lessor would agree to the lease transfer. The lease contract may contain lease transfer clauses or, if they do not exist, the lessor may have a specific procedure. In addition to the possibility of transferring the lease, the lessee must consider what additional fees and expenses would be required for the lease transfer. These additional costs may be negotiable between the old and the new lessee, but they must be known.

Once the lease transfer is established as possible, finding a new lessee is now entirely in the hands of the original lessee. The easiest way to do this is if she finds a friend or relative who would like to acquire the lease. If this is not possible, advertisements for the proposed leasing transfer should be posted on car sales websites or specialized leasing transfer sites.

After finding a potential new lessee, the leasing company will carry out a study on his creditworthiness (in the same way as when concluding a new lease). If the survey results are satisfactory, the lease swap can be made by signing an annex to the original lease agreement, where only the lessee’s name is changed and all other lease terms remain unchanged.

Down payment for the lease transfer

If lessee 2 takes over the lease from lessee 1, then it is logical that there will be no “down payment” on it, because lessee 1 has paid it when the initial lease was concluded.

Accordingly, one can often encounter a lease transfer without the requirement to pay a down payment. This is usually highlighted as one of the benefits of seeking lease transfers for new lessees.

At the same time, the presence or absence of down payment depends entirely on the stage of the lease execution and on the motivation of the lessee 1. For example, for a 60-month lease on a new car with an original entry fee of 10% (which has already been paid by the lessee 1), around the middle of the lease term (30-36 months), it is possible to offer a lease transfer without a down payment because the price of a car of this age would be similar to the leased vehicle. At the same time, if a lease transfer is offered on the 48th month after the start of the above lease, with only 12 monthly installments remaining, then lessee 1 will be willing to receive at least a small amount of compensation for the payments already made, which would be a “down payment” on the lease transfer.

In the case of a down payment for the lease transfer (as opposed to a down payment under the lease), it is paid not to the leasing company but to the lessee 1. It represents compensation for the payments made by him up to the time of the transfer and is entirely subject to negotiation between the two lessees.

Benefits of a lease transfer

If a win-wing transaction exists, then it is the lease transfer.

In the first place, the lessor ensures a reliable new lessee and a lack of overdue payments on the lease.

The benefits of the leasing transfer to lessee 1 are obvious – it achieves the goals of terminating the lease obligations without paying major leasing penalties and fines.

There are also several benefits from lease transfers for lessee 2:

  • Opportunity to acquire a relatively new used car on lease;
  • Opportunity to enter into a lease without a down payment (applicable only occasionally and depending on the lessee 1);
  • Reduced leasing costs. As the leasing car is already the property of the lessor, there is no need to pay the car registration costs. Most likely the car has a paid annual tax and TPL and CASCO insurances. Transfer lease fees are generally minimal.

In the section Used Assets on our site, you can publish your offer for a car lease transfer or search for a suitable vehicle for acquisition.

Car leasing, Leasing practice
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