Capital Goods Leasing Business Proclamation
WHEREAS, for those investors who have the desire, knowledge and profession to participate in various investment activities but could not act due to lack of capital it is necessary to create an enabling environment for the establishment of alternative sources of financing;
WHEREAS, it is believed that lessors of capital goods can fill the existing gap which is not addressed by the existing financial institutions;
WHEREAS, the existing laws concerning capital goods leasing business are found incomplete;
NOW, THEREFORE, in accordance with Article 55 (1) of the Constitution of the Federal Democratic Republic of Ethiopia, it is hereby proclaimed as follows:-
1. Short Title
This Proclamation may be cited as the “Capital Goods Leasing Business Proclamation No.103/1998.”
In this Proclamation, unless the context requires otherwise:
- “Leasing” means a financing in kind for production and service purpose by which a lessor provides a lessee with the use of specified capital goods on financial or operating lease or hire-purchase agreement basis, without requirement of collateral, for a specified period of time and collects in turn a certain amount of installment in periodical payments over the specified period;
- “Lease agreement” or “agreement” means financial lease, operating lease or hire-purchase agreement as defined in this Proclamation;
- “Financial lease” means a type of leasing by which a lessor provides a lessee against payment of mutually agreed installments over a specified period with the use of specified capital goods which is:
a. either already acquired by the lessor; or
b. purchased by the lessor from a third party, known as the supplier, chosen and specified by the lessee;
and under which the lessor shall retain full ownership right on the capital goods during the period of the lease agreement, and, subject to agreement between the two parties, the lessee may have an option to purchase the capital good outright after the termination of the lease period at an agreed price.
- “Hire-purchase” means a type of leasing by which a lessor provides a lessee with the use of a specified capital goods, against payment of mutually agreed installments over a specified period under which, with each lease payment, an equal percentage of the ownership is transferred to the lessee and, upon effecting of the last payment, the ownership of the capital goods shall automatically be transferred to the lessee;
- “Operating lease” means a type of leasing for a period of time not exceeding two years, by which a lessor provides a lessee against payment of mutually agreed rent with the use of specified capital goods that the lessor has at hand;
- “Lessee” means a person who, under a lease agreement, obtains capital goods from a lessor and has the right to use the capital goods, against payment of rent for an agreed period of time;
- “Lessor” means a person who, under a lease agreement, provides to a lessee the right to use the capital goods in return for rent for an agreed period of time;
- “Capital goods” means goods designated as such under the Investment law and directives issued by the Investment Board pursuant to the powers vested in it by the Investment Law;
- “Supplier” means a person, other than the lessor or the lessee, who is in the business of selling goods;
- “Investment Law” means either the Investment Proclamation No.37/1996, or the Investment Incentives Council of Ministers Regulations No.7/1996, or both;
- “Non-cancelable Agreement” means a lease agreement that is cancelable only by the operation of the law or by mutual agreement;
- “Person” means any natural or juridical person;
- “Ministry” means Ministry of Trade and Industry.
Licensing, Features of Lease Agreements and Rights and
Obligations of the Contracting Parties
3. Issuance of License
- capital goods leasing business shall be operated only by a lessor licensed by the Ministry.
- The Ministry shall issue directives concerning the criteria to be fulfilled to obtain leasing license.
4. General Features of Lease Agreements
Any lease agreement shall, among other things, contain:-
- a statement of the type of leasing;
- a description of the capital goods, sufficient to identify it, a statement of the full price of the capital good and the total lease rent payable under the lease agreement;
- the amount of each rent, the period within which the total rent is to be paid, the date or the mode of determining the date on which each installment is payable and a statement that the lessee shall pay the rent on the agreed date;
- a provision showing the responsibility of the lessee for repairing damages caused to the capital goods by third parties during the time the agreement is in force;
- a provision showing the right of the lessee to terminate the agreement and return the leased capital goods to the lessor, where, at the time of its transfer to him, the capital goods is found to have a defect which diminishes its usefulness to the lessee;
- a statement that the lessor undertakes to transfer to the lessee the rights and benefits deriving from the sales contract between the lessor and the supplier of the capital goods;
- a statement that the lessee shall have the right to enjoy quiet possession of the leased capital goods during the entire period of the lease as provided in the agreement;
- a statement that the lessor may not, in his capacity as a lessor, be liable for death, personal injury or damage to the property of third parties caused during the use of the capital goods by the lessee.
5. Specific Features of Lease Agreements
- In the case of a financial lease agreement:
a. the lessee shall hold the capital goods as a mere bailee of the lessor and he shall not have any ownership right on the capital goods during the entire period of the lease;
a. the agreement shall be a full pay-out and non-cancelable agreement;
a. the lessee may, by mutual agreement, have an option to buy or return the capital goods to the lessor on the termination of the lease agreement;
a. a statement that the lessee undertakes to insure and maintain the capital goods.
- In the case of an operating lease agreement:
a. the capital goods leased shall remain the property of the lessor to whom the lessee shall return on the termination of the agreement, unless otherwise the parties agree that the lease be further renewed or the leased capital good be purchased by the lessee;
a. the lessee or the lessor shall have the right to cancel the agreement provided that the party causing damage to the other by early termination of the agreement shall pay compensation;
a. a statement that the lessor undertakes to insure and maintain the capital goods.
- In the case of a hire-purchase agreement:
a. an equal percentage of the ownership, with each installment payment, shall be transferred to the lessee and, upon effecting of the last payment, the ownership of the capital goods shall automatically be transferred to the lessee;
a. the parties shall provide, in the agreement, for the manner by which ownership rights and claims arising form the agreement shall be settled between the lessor and the lessee in case of early termination of the lease agreement by either party;
a. a statement that the lessee undertakes to insure and maintain the capital goods.
6. Defaults in Payment of Rent and Others
- Where the lessee defaults in the payment of the rent, or commits another fault which may breach the agreement, the lessor shall grant him a period of 30 days for remedying the default so far as the default may be remedied.
- Where the lessee does not remedy the default within the period specified in sub-Article (1) of this Article, the lessor may rescind the agreement, repossess the leased capital goods and claim related damages.
- Where the lessee defaults in the payment of the rent, the lessor may recover accrued unpaid rent together with interest and damages, whether the default is remedied or not.
7. Defects on the Leased Capital Good
- The lessor may not warrant against a defect which was made known to the lessee on the making of the agreement.
- The lessor shall make good any damage which the lessee has suffered owing to the defect of the capital goods where the lessor knew or should have known of the defect on delivering the capital goods to the lessee and failed to inform the latter accordingly.
- Unless otherwise provided in the lease agreement, the lessor shall not be liable for defects in and for unfitness for intended use of the capital goods he purchases in conformity with the specifications given by the lessee.
- The lessor has the right to rescind the agreement, with prior notice, and to repossess the leased capital goods, where the lessee does not make use of the capital goods in accordance with the lease agreement or accepted norm or usage and such use entails risk of irreparable damage to the capital goods leased.
- The obligations and conditions of the agreement shall continue with an organ legally subrogated to the judicially bankrupt lessor as long as the lessee performs his obligations in accordance with the terms of the lease agreement.
- The lessor shall not lose his ownership right on the capital goods leased eventhough the lessee is judicially bankrupt.
- Where the agreement is rescinded by the lessee, and the lessee does not deliver the capital goods after having been given due notice to surrender the capital goods to the lessor, the lessor has the right to repossess the leased capital goods immediately and claim damages.
- Where the lessor suffers any damage owing to default on the part of the lessee prior to the transfer of the leased capital goods from the lessor to the lessee, the latter shall make goods such damage to the former so long as the lessor acted in goods faith and costs were incurred by him for purchase of the capital goods at the request of the lessee.
- Where, in the case of financial lease or operating lease agreement, the lessee fails to return the capital goods on the expiry of the agreement, the lessor has the right to repossess the leased capital goods and claim related damages unless otherwise provided in the agreement.
- Transfer of Right
The lessor has the unilateral right to assign his rights under the lease agreement to third parties, but without infringement of the lessee’s right to the quiet enjoyment of the capital goods leased.
- Claim by Third Parties
- Any action by a third party claiming a right on the capital goods shall be brought against the lessor.
- The ownership right of the lessor on the capital goods leased under the lease agreement shall prevail at all times over claims by third parties including creditors of the lessee.
- The lessee shall inform the lessor of any impediments or disturbances by third parties to his quiet enjoyment of the capital goods.
- Where the lessee fails or delays to inform the lessor as provided under sub-Article (3) of this Article, he shall be responsible for any expenses or damages incurred by the lessor.
- Where the value of the capital goods has decreased as a result of legal proceedings instituted by a third party against the lessor, the lessee shall have the right to demand the reduction of the rent according to the new value or the cancellation of the agreement.
- Termination of Lease Agreement
- Any lease agreement shall terminate on the date agreed upon by the parties.
- Unless otherwise provided in the lease agreement, the agreement shall not be terminated by the death or incapacity of the lessee.
- Where, on the expiration of an operating lease, the lessee remains in possession of the capital goods leased and the lessor does not claim its return, the agreement shall be deemed to have extended until such time as one of the parties demand the termination of the agreement.
- Lessee not to Create Charges On Capital Goods
- The lessee shall not create any charge or encumbrance on the capital goods leased.
- Any charge or encumbrance created on the capital goods by the lessee shall be void.
- Encumbrances created by the lessor and taxes claimed on the leased capital goods shall be borne by the lessor.
- Custody and Preservation of the Capital Goods
- The lessee shall take care of and preserve the capital goods as long as it is in his custody.
- The lessee may not change the manner of utilization of the capital goods without the consent of the lessor.
The lessor shall be exempted from customs duties on capital goods he imports in accordance with the Investment Law and the directives issued by the Investment Board pursuant to the powers vested in it by the Investment Law.
- Depreciation Allowance and Income Tax
- In case of financial lease or operating lease, depreciation allowance for capital goods shall be deductible from the rental income received by the lessor, as legal owner of the leased capital goods. However, depreciation allowance shall be for the benefit of the lessee in case of a hire-purchase agreement.
- The rent received by the lessor through the lease agreement shall be treated as income.
- Rent paid by the lessee shall be treated as an operating expense of the lessee and is deductible from his income for the purpose of taxation.
- Powers and Duties of the Ministry
The Ministry shall:
- register lease agreements.
- take appropriate measures in order to ensure the return of the leased capital goods to the lessor, where the lessee has the obligation to return the leased capital goods to the lessor but fails to return it and may order the police to facilitate the execution.
- issue other directives required for the implementation of this Proclamation.
- Application of Other Laws
Unless otherwise expressly provided by this Proclamation, the relevant provisions of the Civil Code and the Commercial Code shall apply to lease agreement.
- Effective Date
This Proclamation shall come into force as of the 5th day of March, 1998.
Done at Addis Ababa, this 5th day of March, 1998.