Financial leasing transactions we know present-day is a popular way of financing. Even though we may track its roots to ancient eastern cultures, it was designed in developed contemporary economies, as an answer to overcoming issues related to a lack of capital in new market conditions. The financial lease agreement today is a named contract of a mixed legal nature since it encompasses elements of various other contracts such as the sales, lease and credit agreements. 

Financial leasing occurs as an alternative to bank credit agreements even though they share some similar features such as payment in predetermined installments, similar accounting methods and the inclusion of interest rates. However, the essential characteristics of financial leasing that significantly differ from other means of financing are related to the fact that funding is approved for a precisely determined good, that the lessor remains as the rightful owner under the contract, and that the lease asset is also pledged as a collateral. 

Financial leasing agreement in Serbian law 

With the enactment of the Law on financial leasing in 2003, the financial lease agreement became a named contract in Serbian legislature. According to the Law’s relevant provision, it can be defined as a contract concluded between the lessor as the provider of financial leasing, and the lessee as the leasing recipient in which the lessor undertakes to transfer to the lessee the right to possession and use of the lease asset, for a certain period of time, during which the lessee enjoys all rewards and bears all risks incidental to ownership. In return the lessee undertakes to make the agreed lease payment to the lessor at the agreed time. 

In financial leasing transactions we can spot a three-dimensional relationship, namely three subjects and two contracts in total – the lessor, the lessee and the supplier of the lease asset. The lessor concludes a supply agreement with the supplier chosen by the lessee by which the lessor acquires the right of ownership over the lease asset. Subsequently, the lessor concludes a financial lease agreement with the lessee. 

The Law prescribes the obligatory elements of the financial lease agreement such as the purchase value of the lease asset, the total amount of the lease payment, the amount of individual lease payment installments and their structure, manner and terms of transfer of the right of ownership, the time period and others. The agreement shall be in writing. The lease payment has been further defined in a standalone provision of the Law as a payment for the use of the lease asset payable to the lessor by the lessee that shall be calculated on the basis of the amount paid by the lessor to acquire the right of ownership of the lease asset, increased by the amount of interest and other costs payable by the lessee to the lesson, all in compliance with the lease agreement. 

The Law also prescribes that an agreement that is not titled a lease agreement but has the features of such an agreement under a financial leasing transaction, within the meaning of the Law, or which provides such rights and obligations for the parties to the lease agreement under the relevant Law, shall be considered a simulated agreement. The Serbian Law on contracts and torts determines that a simulated agreement has no effects among the contracting parties unless it covers another agreement that may be legally valid. 

Looking in the Mercedes rear view: variations of lease agreements and why is the difference important? 

Companies dealing with financial leasing transactions mainly offer many variations of the lease agreement for financing the use of motor vehicles. That the distinction between these agreements matters explains the 2016 case of HMRC v Mercedes-Benz Financial Services UK Ltd. Namely, Mercedes-Benz Financial Services UK Ltd, a subsidiary firm of the Daimler AG company, has been offering three types of car hire packages, namely an ordinary lease agreement called ‘leasing’, a financial lease agreement under the name ‘hire purchase’, and a lease agreement with a purchase option called ‘agility’ that represented a fusion of the beforehand mentioned agreements. These financing agreements had in common that the leasing company retained ownership and that the lessee paid monthly payment installments, but they differed in terms of purchase options. 

Two issues have been pointed out; In the ‘hire purchase’ agreement, the sum of payment installments in principle represented the total sales price of the motor vehicle, including the costs of financing as well. However, British consumer protection regulations limit the amount the seller may request from the consumer within such a contract with a purchase option. Furthermore, in the ‘agility’ agreement the monthly payment installments were cheaper in general since their total amount represented approximately 60 percent of the total selling price of the vehicle. In case the lessee wanted to purchase the vehicle, he or she had the option to do that in consideration for a ’balloon’ payment that varied between 42 to 48 percent of the initial purchase price. The main problem arised in the accounting area due to the way the Tax Administration Office defined these contracts according to the EU VAT Directive. With regard to these variations of the financial lease agreement, the Tax Administration Office considered that they were about a delivery of goods, instead of a delivery of services, that made a significant difference in the aspect of paying value added tax. 

Financial lease agreements as adhesion contracts 

For the conclusion of a financial lease agreement, leasing companies use adhesion contracts. These are non-negotiable contracts, namely forms with predetermined elements and conditions presented by one contractual party that represent a general and permanent offer. Since negotiations don’t precede the conclusion of such agreements, it is important that the agreement’s terms and conditions (often referred to as general conditions) were known or had to be known to the other party. 

The relevant legislation provides additional rules of interpretation when it comes to such agreements, i.e., the rule that obliges the court to interpret the contract in favor of the weaker contractual party. The Commercial Appellate Court confirmed this additional rule of interpretation in the case Pž no. 1128/2015. Given that financial lease agreements were prepared and proposed by one party, namely the leasing company as the lessor, vague provisions of such agreements should be interpreted in favor of the other contractual party as the economically weaker party. 

That this provision is not a wide and infinite possibility to challenge agreements by lessees tells us another case, namely a 2020 judgment of the Serbian Commercial Appellate Court. A contractual provision about financing costs is not indefinable or illegal if the plaintiff was familiar with the total sum of the costs, yet not with the composition of such costs. Among other things, the court in question stated that, as it was a commercial contract, the plaintiff as a corporate entity had to approach the agreement with due care and if any provision was not clear, the plaintiff had the possibility to require additional clarification. 

Termination of financial lease agreements and compensation for damages 

Given that the matter has been clearly defined by relevant legislation, in this part we will cast some light on case law. Most examples are related to the termination of the financial lease contract and the effects of termination.  

• What is the lessor entitled to if the lessee does not fulfill contractual obligations? 

The Law stipulates that the lessor that terminates the contract for that reason has the right to return the asset and seek compensation for suffered damages. In the case of Gž no. 1880/2020 the Appellate Court in Kragujevac determined that the first-instance judgment correctly awarded to the plaintiff an amount that is greater than the value of the vehicle itself, because the plaintiff has the right to seek the fulfillment of contractual obligations and compensation for damages. 

• Does the fact that a financial lease agreement has by terminated by the will of the plaintiff or with the passage of time have an impact on the right to compensation for damages? 

That the lessor has the right to compensation for damages in case of non-payment of monthly installments regardless of the fact whether the financial lease agreement has been terminated by the will of the plaintiff or has ended due to the passage of time was concluded by the Appellate Commercial Court in the case Pž no. 2430/2014. The lessor is also entitled to seek compensation according to the general rules on compensation for damages within the provisions of the Serbian Law on Contracts and Torts. The opposite conclusion would lead to an infringement of the contractual principle of equality. 

• How to calculate the scope and amount of damages? 

Parties can determine within the agreement how to calculate the amount of damages freely with the notion that the amount doesn’t exceed the total value of the leasing payment. If parties didn’t define this matter within the agreement, the Department for Commercial Disputes of the Appellate Commercial Court gave an answer to such a disputed question at one of its sessions. Namely, the lessor has the right to claim compensation for damages that will put the leasing company in the situation it would have been in if the lessee had fulfilled contractual obligations. If the lease asset was returned to the lessor after the agreement’s termination and subsequently sold to a third party or the lessor concluded another financial lease agreement, the sale price of the lease asset or the agreed leasing payment will be taken into account when measuring the amount of damages. If the lease asset has not been sold or a new contract has not been concluded, the market price of the lease asset will serve as a basis. 

Financial leasing and the criminal offence of embezzlement 

The basic form of the criminal offence defined by Article 207 (1) of the Serbian Criminal Code is defined as a situation when someone, with the intent to obtain for himself or another unlawful material gain, appropriates another’s movable object entrusted to his care on a legal basis that doesn’t lead to acquiring ownership. Qualified forms of the offence relevant for financial leasing transaction refer to the monetary value of the asset. Taking all this into consideration, we shall now present two divergent conclusions in our case law. 

The Serbian Supreme Court found in the case Kzz 524/3017 that the deed of the defendant who, with the intention of obtaining unlawful material gain, appropriated agricultural equipment that was entrusted to him on the basis of financial lease and rental agreements, produced all the subjective and objective features of this criminal offence. A different standing was taken in 2021 by the same court in which it was stated that the defendant didn’t commit that criminal offence since the legal nature of the financial leasing agreement can lead in the end to the acquisition of the asset, and that contractual infringements are under the protection of civil law. However, the factual description of the second case differs from the factual description of the 2017 verdict,  

We hereby note that such examples are given only to illustrate the connection between this criminal offence and financial leasing transactions, and that due to the complexity of criminal law and the diversity of factual descriptions, there cannot be a one-size-fits-all answer. 

Sources: 

• Legislation: 

Criminal Code (Official Gazette of the Republic of Serbia no.  85/2005, 88/2005, 111/2009, 121/2012, 104/2013, 108/2014, 94/2016 i 35/2019). 

Law on Contracts and Torts (Official Gazette of the Republic of Serbia no. 18/2020). 

Law on Financial Leasing (Official Gazette of the Republic of Serbia no. 55/2003, 61/2005, 31/2011 i 99/2011- other). 

• Case Law: 

Gž no. 1880/2020 (2021) Appellate Court in Kragujevac (Case law of commercial courts – Bulletin of case law of the Appellate Court in Kragujevac no. 1/2022). 

HMRC v Mercedes-Benz Financial Services UK Ltd (2016) C-164/16 (CJEU). 

Kzz no. 524/2017 (2017) Supreme Court – Serbia. 

Kzz no. 1186/2021 (2021) Supreme Court – Serbia. 

Pž no. 2430/2014 (2015) Commercial Appellate Court (Bulletin no. 1/2016). 

Pž no. 4105/2019 (2020) Commercial Appellate Court (Bulletin no. 4/2020). 

Pž no. 1128/2015 (2016) Commercial Appellate Court.