Article by Dubravka Kosic, partner of the Belgrade Office

On 27 May 2003, the Parliament of the Republic of Serbia adopted the Law on Financial Leases which was published in the Official Gazette of the Republic of Serbia on the same day. The provisions of the Law came into force on 3 June 2003, except for the provisions relative to the Register of Financial Lease Contracts, Articles 45 50, which became effective on 1 January 2004.

The Law on Financial Leasing was proposed in order to encourage the revival of trade activities, development of economy and market adjusment by giving the possibility of purchasing modern equipment without investing one's own capital of funds granted by credits. This Law therefore has authorised the creation of new independent leasing companies.

A financial lease agreement involves three parties: the supplier, the lessee and the lessor.

The agreement is composed of two documents, namely:

  • A supply contract stipulated between the lessor and the supplier on the basis of which the lessor acquires the right of ownership over the object of the lease;
  • A lease contract over the above mentioned object entered into by the lessor and the lessee in which the conditions of maintenance and use, as well as the amount of the lease fee are stipulated.

It must be noted that the good is usually acquired by the lessor further to the specifications and conditions previously established by the lessee.

A financial lease agreement must be contracted for a minimum time period of two years, and the object of the lease may only be movable and nonconsumable goods.

In order to have legal effect, a financial lease must be concluded in writing and must contain the following mandatory elements:

  1. a precise specification of the object of the lease;
  2. the amount of the lease fee;
  3. an annual plan/repayment schedule, providing number and amount of instalments, and payment dates;
  4. the term for which the agreement is entered into.

The financial lease contract may specify all other rights and obligations assumed by the contracting parties, such as the place, time and manner of delivery, the title of ownership, the insurance and the purchase option.

The lessor, which can either be a foreign or a national legal entity, must be a company registered for lease operations, whith a minimum basic capital of EUR 100,000.

The lessee may either be a legal entity or an individual person without any specific legal limitations.

The supplier can either be a legal entity or an individual person.

It is important to note that the lessor and the supplier cannot be a sole legal entity. Should this situation arise, it will not be considered that a lease contract has been entered into and this Law will not apply to it. Instead, the general provisions regarding the Law on Contracts would apply in such an event.

The Lessor who has acquired the good object of the financial lease from the supplier retains the right of ownership over it until the expiry of the term of the lease, and thereafter it has to be established whether the object matter of the lease will be bought back by the lessee or returned to the lessor, or whether the lease contract will be extended.

Pursuant to Article 16 the supplier is liable for material defects, unless otherwise stipulated in the lease contract, while the lessor is liable for legal defects.

Sanctions are not envisaged for material defects. In this event, general provisions regarding Contract Law apply: the lessee has the right to terminate the contract or to ask for a lower price.

Liability for legal defects is envisaged in a detailed manner and obliges the lessor to remove within the shortest time possible all third parties' rights over the subject of the lease; provided, however, that the lessee notifies the lessor of any legal impediment within a reasonable time. The lessee is entitled to compensation for damages, as well as to the right to terminate the contract where the lessor fails to act according to its request.

The lessor may assign the right of ownership to third parties without limitation, under conditions that do not cause any incovenience to the lessee.

Termination of the contract is envisaged in the following cases:

  1. (the lessee has the right to terminate the contract) in case of nondelivery of the good object of the lease;
  2. (the lessor has the right to terminate the contract) in case of delay in payment of the first instalment or delay in payment of other instalments, where the overdue amount reaches ¼ of the total price of the lease.

The lessor has moreover the right to terminate the contract if the good object of the lease has been yielded to a third party without his consent. When the contract is terminated, the lessor has the right to be restituted with the good object of the lease or to be paid compensation for damages that is equal to the amount of the price of the contract that the lessor would have been paid if the contract had been fully respected.

Article 30 of the Law introduces a major novelty regarding the special procedure to be conducted before the competent Court. The Law foresees indeed the signing of a judicial settlement by the parties (lessor and lessee) on the basis of which the Court can issue a decision transfering the good object of the lease to the lessor. Where one of the contracting parties fails to meet the obligations indicated in the said settlement, the other party may file a petition with the Court within 3 days from the date of this violation. The Court must issue its decision within 3 days. The opposing party has the right to lodge a complaint against the Court's decision within 3 days of the date of the receipt of the decision. This does not postpone its enforcement.

One cannot expect such efficiency of procedure, particularly when the subject matters of leases are movable goods such as cars, computers, etc. No doubt these provisions will be more efficient in the case of static equipment; however, practice will demonstrate the true extent to which these provisions of the Law will be efficient and how they will be harmonized with the current functioning of courts.

The risk for the accidental damage or destruction of the object matter of the lease is borne by the lessee, who assumes this risk on the date when he takes possession of it. The Law envisages the obligation to subscribe an insurance in this effect, unless otherwise stipulated in the financial lease contract.

The Law also envisages the lessor and the supplier's joint and several liabilities concerning the determination of the subject of lease.

The Law does not envisage customs and tax regimes or options as essential elements of the contract, but only as a possibility. In this regard, according to the customs regulations in force in Serbia, the situation is such that where a lessor is an individual legal entity or a financial organization, the lessor must pay the full amount of the customs duty related to the object of the lease, as well as the relevant tax. In this regard dilemmas will emerge with respect to a significant increase in value as well as with respect to a possible return of the goods abroad. There is no doubt that the Ministry of Finance will have to provide detailed instructions in connection with this issue.

However, if the lessor is a foreign legal entity or a financial organization, temporary import is approved for the period in which the lease contract is entered into, while customs duties are paid in instalments and tax only at the time when the lessee buys back the object of the lease. In this regard, the text of the Law on Financial Leasing is more favorable with respect to foreign legal entities or financial organizations acting as lessors. The Customs Law is applied, namely its section governing temporary import or export of goods, as well as the Regulation on Temporary Export and Import of Goods.

Further legal dispositions in connection with the issue of customs duties and taxes were therefore to be expected in order to complete the law on Financial Leasing in this matter.

Chapter 7 of the Law on Financial Leases introduces a financial lease Registry, which is a public register of all relevant data including a description of the leased goods and the parties to the agreement. The lessor must report and register the financial lease contracts he enters into. Each financial lease and its modifications must be registered within 8 days of the date of the coming into force of the contract, or of its amendments.

The above is a basic overview of the Law, and for each contract concluded, different interpretations will be necessary. Needless to say, these interpretations will also be read along with the official interpretations of the competent authority who is responsible for the Law's application.

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.