The institute of business or operational leasing is not prescribed in the positive regulations of the Republic of Serbia. In the business practice of economic entities, the term operational leasing is used, which means the lease of movable and immovable property, i.e. sale with instalment payments of the price for the purchased item, which is precisely regulated by the provisions of Art. 567 to 599 (lease of property) or Art. 542 to 551 (sale with instalment payments of the price) of the Law on Obligations “Official Gazette of the SFRY”, No. 29/78, 39/85, 45/89 – decision of the USJ and 57/89, “Official Gazette of the FRY” “, No. 31/93,” Official Gazette of Serbia and Montenegro “, No. 1/2003 – Constitutional Charter and” Official Gazette of RS “, No. 18/2020).
Operating leasing activities may be performed by companies in the field of production (equipment), i.e. companies in the trade area as an ancillary activity within their core production business, i.e. trade.
Operating leasing activities are not within the competence of the National Bank of Serbia and are not subject to the obligation to provide share capital from Article 10a of the Law on Financial Leasing (“Official Gazette of RS”, No. 55/2003, 61/2005, 31/2011 and 99/2011 – dr. laws) (from now on: the Law on Financial Leasing).
Operating or business leasing has the characteristics of a classic lease in which the contract does not transfer all benefits and risks related to the ownership of the leased object. Still, the lessor (lessor) retains ownership, i.e. remains the owner of the leased thing after the expiration of the contract and the lessee, after the expiry of the period of use, must return the object of leasing, extend the service or repurchase it at the agreed price.
Types of operating leases
Depending on the method of financing and the relationship that arises during the transaction of operating leasing of movable property, we distinguish:
- direct operating leases
- indirect operating leases
Direct operating leasing is a type of leasing business in which the lessor is also the manufacturer of the leased object, which is leased. There are two persons with this type of contract – the lessor and the lessee.
In the case of indirect operating leasing, the participants in the leasing business are:
- manufacturer or supplier
- lessor and
- the user of the leased object.
In this transaction, the lessor procures the object of leasing from the supplier and gives it for use to the lessee, who in turn is obliged to make periodic payments to the lessor under the conditions defined in the lease agreement. Thus, two contracts are concluded (contract of sale and delivery and contract of lease) in which the lessor is the subject in both contracts.
The supplier of the leased object is the economic entity that manufactures equipment, machinery, plant, i.e. the thing of leasing and leases it to the lessee or sells it to the leasing company.
The user or lessee is the participant in the leasing business, the importer, who needs the subject of leasing to perform business activities. Based on the leasing contract, he receives the object of leasing, puts it in the function for which it is intended, uses it and services the obligations in the name of leasing, as a rule from the income generated by its use.
Elements of an operating lease agreement
Essential elements of an operating lease agreement
The essential elements of an operating lease without which the lease is deemed null and void are:
- the item is given for use and
- the price of that use.
The subject of the contract is the thing that is leased, and most often, it is investment equipment, movable or immovable goods.
The leasing fee (rent, leasing price) represents the amount of money that the lessee pays to the lessor for the use of the leased object, at the time and in the manner regulated by the contract. The deadline for payments, their number, the amount of individual instalments, possible non-fulfilment of payment obligations, and all other issues related to the compensation price should be regulated by the operating lease agreement.
The amount of the leasing fee as the price of using the item is determined by several factors. It contains various individual costs and risks borne by the lessor and passed on through the fee to the user.
The amount and structure of material costs and premiums on behalf of the risk determine the leasing arrangement’s price.
The leasing fee is formed in such a way as to cover all tangible and intangible costs of the operating lessor plus increased risks and expected profit. When creating a lease charge, the operating lessor usually includes the following items:
- Depreciation costs should reimburse the leased asset cost, if not in full, then as much as possible until the end of the lease period. Namely, in operating leasing, the lease term, i.e. the lease term, is significantly shorter than the anticipated economic life of the asset and contains a revocation clause, so it can be cancelled before the lease term expires, and the total lease amount paid by the lessee is usually less than fair value leased assets. In contrast to operational leasing, in the case of financial leasing, the sum of all leasing fees exceeds the purchase value of equipment, because only in this way can the lessor of operating leasing reimburse investments and make a profit
- financing costs, if the lessor had them in obtaining the subject of leasing
- Risk premiums, namely the revocation premium that provides the lessor with the risk of early termination of the lease, inability to collect receivables (political risk present in international leasing transactions), currency risk, inflation risk, etc. Including these premiums in the leasing fee increases the fee by an average of 2% to 5%
- costs of servicing and providing services related to the subject of leasing if the lessor perform them
- Operator Leasing Profit.
The leasing fee can be paid monthly, quarterly, semi-annually or annually. As far as modalities are concerned, the most common case in practice is that the leasing fee is agreed on a monthly linear basis in fixed amounts. Leasing fees can also decline, which means that the user pays higher payments in the first months, and subsequent instalments are lower by a certain percentage. Such cases are common when it comes to leasing with the option to purchase the subject of leasing.
In contrast, the repayment of the leasing fee can be of a growing type, i.e. lower payments in the initial period and higher in the later months, which is suitable for leasing users who do not initially achieve maximum capacity utilization.
Ancillary elements of the operating lease agreement
Ancillary elements of the operating lease agreement are also determined by law, but the subjects of the agreement can regulate them in another way at their own free will. These are the term for which the contract was concluded, the possibility of termination of the contract, the manner of its ending, the option to purchase or extend the contract, as well as the place, time and method of delivery of leased assets, issues related to installation, maintenance, transport, replacement, testing, etc.
The contract may also specify the elements that determine the party that is obliged to ensure the object of leasing, the risks from which it should be insured, whether there is an obligation of the lessor to train staff to handle the thing, possible assignment (assignment) of the contract, ways of resolving disputes (jurisdiction of the domestic court or some other party to the arbitration), the currency of payment, security of payment, language and correspondence and other elements on which agreement is reached.
Parties to a financial leasing transaction »