Signing of the leasing contract and initial payments

сключване на лизингов договор и първоначални плащания

Leasing practice

Step 7 Signing of the leasing contract and initial payments

In this phase of the leasing practice, the lessor offers for signing his standard leasing contract and the accompanying documents, and the lessee accepts and signs them (the more frequent action), or expresses his / her wishes for corrections (possible but rare).

The Documents

The legal department of each lessor have prepared a standard lease agreement and all accompanying documents – general terms, repayment plan, acceptance and delivery protocols, policies, invoices and all other necessary documents. The lessor’s lawyers and experts have tried to cover all possible developments in the relationship with the lessee. For this reason, sometimes leasing contracts can reach up to 10 pages. Accordingly, some lessors divide them into two parts – a “leasing contract” that describes the specific parameters of the lease and “general terms” – a document that describes the standard rights and obligations of the lessor and the lessee under all possible developments and corresponding relationships in the course of the leasing contract.

The Lease Contract

The core leasing contract always includes the main parameters of the leasing transaction. Here are some of the most common:

  • Number and datethe lessor usually assigns a number to each lease, which will then provide an easier reference to it. The lease contract number is usually related to the date of signing the lease agreement;
  • Name and representatives of the lessorthese are the representatives who will sign the leasing contract from the lessor;
  • Name and representatives of the lesseeprovides details for the representative of the lessee who is entitled to sign the lease on behalf of the lessee;
  • Lease contract currency – although we live in Bulgaria, most lessors prefer to enter into leases in euros and not in leva. The reason is that lessors prefer to transfer the BGN/EUR currency risk (whatever it may be) to the lessees;
  • Supplier – the name of the vendor is usually mentioned in the lease so that it is unequivocally determined where the lease asset will be purchased and who will bear the guarantee (if any);
  • Delivery price – this is the price at which the leasing asset will be acquired. The price usually includes the value of the leasing asset and the corresponding VAT. For natural persons – lessees, the final sum of the two is important, but for most corporate customers who would have the right to a tax credit, VAT plays an important role;
  • Leasing asset – a brief but unambiguous description of the leasing asset, such as a car, brand, model, new or used;
  • Placement – here is the standard storage location of the leasing asset. For industrial equipment, this will be the address of the business that will use it. For a car, this will normally be the address of the lessee or his garage / parking lot;
  • Lease contract term – this is the total duration of the leasing relationship, which is usually measured in months, multiples of 6, for example 12, 18, 24, 30, 36, etc.;
  • Fees and commissions – each lease contains fees and commissions. Part of these are third-party charges that the lessor pays and re-invoices to the lessee, because they have arisen as a result of the lease, for example, charges from the Traffic Police for the registration of the leasing vehicle, the registration fee for the lease in the Central Register for Special Pledges, notary fees, etc. Others are the fees and commissions that the leasing company itself collects for its various services, such as “Document Fee,” “Lease Management Fee,” and the like;
  • Initial installment – the initial installment is the lessee’s start-up participation in the lease, which is usually calculated as a percentage of the delivery price, for example 10%, 20%, etc. The lease agreement also stipulates the nominal value of the initial installment in BGN or EUR in order for the lessee to know exactly how much money to prepare for kicking off the contract;
  • Insurance premiums – Most leasing contracts provide for the conclusion of one or more insurances related to the leasing object, such as CASCO and TPL in the case of vehicles. Insurance premiums are usually deferred – for three months, half a year or for the first year of the lease. Their term depends on the conditions offered by the insurance company. It is important for lessees to keep in mind that after the expiration of the relevant term, this obligation for payment of the insurance premium will be resumed for the next period;
  • Leasing amount – this is the delivery price with the deducted initial installment, or the amount with which the lessor finances the lessee at the start of the lease;
  • Initial payment – Initial payment is the sum of all the lessee’s liabilities due at the beginning of the lease. These include the initial insallment, various fees and commissions, and insurance premiums. For closed-end leasing and initial payment of VAT, the full VAT will also be included here;
  • Lease interest – some leasing companies show the absolute value of the leasing rate of interest for the entire term of the contract, others indicate the interest rate that is applicable for the calculation of the interest amount. Sometimes both are displayed. Sometimes – neither;
  • Maturity – the date of each month on which the lease payments will be due;
  • Monthly installment – this is the monthly payment due by the lessee for the lease period. Monthly installments are usually the same;
  • Delivery term – the length of time that the lessor engages to purchase and deliver the leasing In automobiles, it will usually range from a few days to a few weeks, whereas for industrial equipment it can be up to one year or longer;
  • Residual value – some types of leasing contracts provide for a Residual value. This is part of the delivery price (5, 10, 15 …%), which is not paid in the monthly installments. At the end of the lease the lessee has an option for its payment (in the case of an open-end-lease). The Residual value must be precisely defined as a percentage of the delivery price and also as an absolute amount;
  • Additional services – some leasing contracts also provide additional services. Most often, these are operating leases, but it is quite possible to have additional services in financial leasing transactions as well, either as a promotion (for example, a change of tires), or as additional services (such as insurance or a replacement car). Additional services need to be accurately described and not to allow for double interpretation, because they are included in the leasing price;
  • Limitations and sanctions – some lease agreements provide for strict restrictions on the operation of the leased asset. Perhaps the most illustrative example is an annual limitation to the millage of a leased vehicle (usually operating leases) and penalties when exceeding the stipulated The limitations are related to the quality of the leased asset as collateral of the leasing transaction and the possibility of a sharp impairment of the leased asset in the case of more intensive use. The purpose of the sanctions is to compensate for the extraordinary physical depreciation.

The lessor and the lessee sign the leasing contract as proof of exceptance of all leasing parameters.

General Terms and Conditions

The “Terms and Conditions” describe the obligations and rights of both parties within the leasing contract as well as the various circumstances, such as delay in payment of the monthly installments, damage to the leasing object, etc. These may be a continuation of the Leasing Contract (as described above) or be drafted as a separate document. You can view Porsche Leasing’s Terms and Conditions here. The General terms and conditions are also signed by both parties in evidence that the rights and obligations described are accepted.

Repayment plan

The repayment schedule is usually issued at the beginning of the lease (unless the delivery period is very long). The repayment plan should be an exact copy of the lease offer which was accepted by the lessee. It is important to note that it is usually a “reference” to the extent that a lease interest rate change (at a contracted variable interest rate lease) is possible. Nevertheless, the repayment plan gives a good idea of ​​the maturity dates of the lease and the amounts due. Some leasing companies give a detailed breakdown of the due amount of each maturity – principal, interest, VAT, remaining lease amount. For corporate customers, the breakdown is important for the accurate booking of each liability and subsequent payment.

Usually a signature by the lessee is required upon the Repayment Plan, as proof that he accepts the liabilitites described therein.

Pro forma invoices

Pro forma invoices are a document that looks the same way as the final invoices. They also contain the same requisites. Their primary purpose is to guide the lessee to the initial payment. They do not require signatures because they are just used for reference.

Conclusion of the leasing contract

The conclusion of the leasing contract is simply the signing of the documents listed above by both parties. Less often, lessors require this to happen in the presence of a notary in order to legitimize the representative of the lessee. If this is the case, it is important for the lessee to provide for some additional payment for the notary fees, which naturally should be known in advance.

Once signed, the two parties to the lease deal receive one copy of the lease and the accompanying documentation for their files and reference.

Initial payments

Typically, the leasing agreements (or their General Conditions) provide for their effectiveness following the initial payments. The lessee is already fully informed of the amounts initially due and the period within which the payment is to be made (normally the grace period is up to one week).

The initial payment includes:

  • Initial installment;
  • The first insurance premiums;
  • Fees and commissions due to the lessor;
  • Fees and commissions compensating the lessor for expenses for third party services;
  • VAT – where applicable, up to the agreed amount.

These are fully described in the proforma invoice and are paid by the lessee to the lessor.

Upon receipt of the initial payment from the lessee, the leasing contract is deemed active and the lessor initiates the order and purchase of the leasing asset.

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