Italy: Newly Introduced Definition Of Financial Lease Under Italian Law

Last Updated: 26 January 2018
Article by Francesco Dialti

1 Foreword

According to law no. 124/2017 (published in the Official Gazette on 14 August 2017 and entered into force on 29 August 2017) (the "Law"), the Italian legislator has introduced into the Italian legal system an express definition for financial lease agreement (locazione finanziaria). The Law also introduces provisions on termination of financial leases.

While the Law aims at creating a more certain legal framework for such financing technique commonly used in the Italian practice (in particular, in the real estate and transportation sectors), it is worth underlying that the Law itself gives rise to legal uncertainties, some of which are dealt with in this memorandum.

2 Historical background

Although financial lease has been a popular financing technique in the Italian market for many years (starting from the 1980s and growing exponentially, especially in the real estate and transportation sector) and Italian law already had various provisions regulating financial lease (for accounting, tax and bankruptcy purposes), Italian law did not provide so far an express definition of financial lease.

In practical terms, this means that, so far, financial lease qualified as an "atypical contract", i.e. a contract worth of being acknowledged but not expressly provided for as a specific contract in the legal system. This involves that an atypical contract is construed by scholars and the case law by applying – by way of analogy – those provisions set forth for other types of agreements. In the case of financial lease, subject to the matter at issue, the case law used to apply those provisions dictated for (i) sale with retention of title, (ii) rental agreement, (iii) lease agreement, etc. This gave rise to different views of the Italian courts on certain aspects of financial lease regulation.

3 Definition of financial lease under the Law

According to the Law financial leases are defined as follows:

"the agreement whereby a bank or a financial intermediary registered with the register held by the Bank of Italy under Article 106 of the Italian Banking Law undertakes vis-à-vis the lessee to buy or let build an asset at the choice and upon the instructions of the lessee, which shall bear all the risks relating to the asset, including risk of loss, and the lessor makes the asset available to the lessee for a given period of time in consideration of an amount which takes into account the purchase or construction price and the duration of the agreement. Upon expiry of the financial lease agreement, the lessee is entitled to purchase the asset at an agreed price; failing exercise of such option, the lessee shall return the asset to the lessor."

Such definition seems to involve that only banks and financial intermediaries will be entitled to act as lessors; therefore, notwithstanding the fact that financial lease is a financing technique, other players which are entitled to act as lenders in Italy based on recently enacted legislation (such as insurance companies and funds) will not be entitled to act as lessors.

4 Termination of financial leases

According to the Law, in case of the lessee's serious breach, the lessor will be entitled to terminate the financial lease. A serious breach occurs if the lessee fails to pay six monthly rentals, or two quarterly rentals for real estate assets, or four monthly rentals for other assets.

However, the Law does not clarify whether the parties to a financial lease agreement are entitled, in their contractual freedom (which is a general principle of Italian contractual law), to agree the termination of a financial lease even in case of default of a lesser amount of monthly rentals (which is a common provision under the Italian financial lease practice).

Also, the Law does not clarify whether other types of breach by the lessee (e.g., the lessee not carrying out the necessary maintenance works of the asset, thus reducing its value) may entitle the lessor to terminate the financial lease; again, this is a common provision in the Italian practice.

Pursuant to the Law, in case of termination of a financial lease the lessor shall be entitled to have the asset returned, sell it and be paid out of the proceeds of the sale. The lessor is bound to remit to the lessee the proceeds of the sale, less the aggregate of: (i) the instalments due and still unpaid as at the date of termination of the financial lease; (ii) the instalments not yet due and payable (but in respect of the principal amount only, and not interest); (iii) the price that the lessee should pay under the financial lease agreement to exercise the purchase option; and (iv) any costs and expenses borne by the lessor for the asset recovery, evaluation and custody until its sale. This does not impair the lessor's rights if the proceeds of the sale of the asset are lower than the amount owing by the lessee to the lessor.

Such a provision seems to involve the voidness of penalty clauses, which are commonly included in financial lease agreements, pursuant to which, in case of termination, the lessee is bound to pay to the lessor, in any event, the full amount due on account of interest.

5 Final considerations

The Law finally introduces an express definition of financial lease into the Italian legal system.

The Law has been welcomed by most players as it is expected to reduce uncertainties and litigation and, thus, shall further boost utilization of financial lease as a financing technique in Italy.

Only banks and financial intermediaries registered with the register held by the Bank of Italy, however, will be authorized to act as financial lessors in Italy.

It is not crystal clear how the Law will affect agreements existing at the date of entry into force of the Law (including those agreements in whose respect a trigger event was outstanding as at 29 August 2017). The case law shall clarify this.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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