Legal And Financial Aspects Of Financial Leasing Subject Replacement

Upon providing services to clients doing business in financial leasing, we come across with a variety of issues, relating to regulating a financial leasing agreement. Earlier we wrote on enforcement practices by courts in relation to financial leasing. You may read our previous publications at the following link.

In the present article we will consider one of the important aspects of financial leasing, in particular, possibility and consequences of replacement of a subject of financial leasing. As for consequences, in the present article we will focus on applicability of tax preferences upon replacement a subject of financial lease.

Let's consider the following example. A leasing company ("Lessor") and a construction company ("Lessee") concluded an agreement on financial leasing, wherein Lessor undertook to acquire hydraulic excavator chosen by Lessee ("Leasing subject") according to specification as determined by an agreement of financial leasing, and transfer it to Lessee. For execution of the financial leasing agreement Lessor concluded a sale-purchase agreement with a seller of Leasing subject.

Lessor properly executed its obligation to supply Leasing subject of a proper quality meeting the requirements as required by Lessee. However, after a certain period time Lessor began using Leasing subject, Lessee requested Lessor to replace it for equipment, as it turned out that technical characteristics of the leasing subject did not meet requirements of a specific task for which it was used. Lessor and Seller is ready to replace, however they are not certain whether Kazakhstan legislation allows replacement of leasing subject upon financial leasing and would like to ensure on the potential consequences of such replacement.

Kazakhstan legislation determines the cases where replacement of the leasing subject is allowed.

First, according to Civil Code of Republic of Kazakhstan dated 27.12.1994г. (further «Civil Code») Lessee has a right to require replacement of leasing subject when it is of an improper quality and of an incomplete set .

Secondly, Kazakhstan law «On financial leasing» dated on 05.07.2000г. (further «Financial Leasing Law») provides for a right of a lessor to replace leasing subject, in cases, when the leasing subject (i) is not supplied; (ii) is supplied with a significant delay; or (iii) supplied with irremediable deficiencies preventing use of leasing subject by designation, except cases when the seller and the leasing subject...