Finance leases
Finance leases

The following Banking & Finance practice note provides comprehensive and up to date legal information covering:

  • Finance leases
  • Characteristics of a finance lease
  • Advantages of a finance lease

This Practice Note considers the key criteria for the existence of a finance lease as well as its main characteristics. It also looks at the main advantages of a finance lease. This Practice Note should be considered alongside the notes relating to operating leases (see Practice Notes: Operating leases and Lease finance structures) and alternative leasing structures (see Practice Note: Alternative leasing structures).

Characteristics of a finance lease

A finance lease is described as a lease which transfers substantially all of the benefits and risks associated with the ownership and use of the asset to the lessee, leaving the lessor with only the financial risks and benefits.

The key difference between a finance lease and an operating lease is whether the lessor (being the legal owner who rents the assets) or the lessee (who actually uses the asset) assumes the risks of ownership. The lessee will take on all of the risks in relation to loss or damage to the asset and will be responsible for obtaining the necessary insurance cover.

Any leased assets are shown on the balance sheet of the lessee, with any amounts due under the lease shown on the balance sheet as liabilities.

The term of the lease may be divided into two distinct parts: an initial primary period during which the lessor will recover the financial investment which it made in the

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