Finance Leasing: Use Without Ownership, Full Liability

Finance Leasing

Finance leasing is not regulated in the BGB. German courts have developed the rules over decades of case law, which makes the contract itself especially important.

Almost anything can be leased: vehicles, machinery, IT infrastructure, production equipment, medical devices. The principle is always the same: the lessor owns or acquires the asset and makes it available to the lessee in return for monthly instalments. The lessor remains owner, though a purchase option is common.

Purchase, Lease, or Lease – What Is the Difference

Leasing sits between purchase and rental. A buyer becomes owner and bears the risk of loss. A tenant under a lease does not become owner and bears no risk for the asset. The lessee under a finance lease also does not become owner but bears economic risk like an owner. That is why finance leasing is usually cheaper than renting.

The difference from a loan – despite a similar financing function – is that in a loan money is advanced, not the asset directly.

Who Bears the Risk

The lessee is liable for damage, destruction, and loss of value of the asset – which is why finance leasing essentially always requires comprehensive insurance. Watch out: some policies have exclusions that only come to light in a claim.

Early Termination

Finance lease agreements have fixed terms. Early exit requires payment of a contractually defined redemption amount. If one of the rare grounds for extraordinary termination exists, early exit is possible without that cost.

Mileage Leasing and Residual Value Leasing

For vehicle leasing it is worth understanding the model. Mileage leasing is predictable: drive more than agreed, pay a supplement; drive less, receive a refund. Market risk sits with the lessor.

Residual value leasing is the opposite. At the end of the term the actual market value of the vehicle is compared with the projected residual value. If the market value is lower, the lessee pays the difference. If it is higher, the benefit goes to the lessor. The market risk sits with the lessee – something many drivers only understand when returning the vehicle.

Tax Treatment

Whether lease instalments are deductible as business expenses, and how the asset is treated on the balance sheet, depends on how the contract is structured. Attribution to lessor or lessee follows the Federal Finance Ministry’s leasing decrees. A tax adviser should be involved before signing.

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