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Leasing law governs the lease, which is a transfer of interest in property for a specified period without transferring ownership. In a lease, the right of possession is transferred, not the right of ownership.
According to Section 2 (15A) (b) of the Companies Ordinance 1984, a financial institution includes a leasing company. The regulation of leasing companies is outlined in Section 282-A of the Companies Ordinance 1984, which is part of the Non-Banking Finance Companies (NBFC's) framework. The Federal Government has set rules for the establishment and regulation of NBFCs, including leasing companies. A leasing company cannot be incorporated without prior approval from the Securities and Exchange Commission of Pakistan (SECP), which also issues the necessary licenses.
Due to the practical challenges faced by NBFCs involved in leasing, the SECP has issued directions to ensure that these companies conduct their business in accordance with the Prudential Regulations for NBFCs. These regulations are similar to the ones outlined in the Leasing Companies (Establishment and Regulations) Rules 2000.
Rule 2 (xxx) of the Non Banking Finance Companies (Establishment and Regulations) Rules 2003 prescribe that a leasing company means a company licensed by the Commission to undertake leasing. Rule 2 (xxix) Leasing includes financial services provided on operating lease or finance lease basis, in accordance with International Accounting Standard. The leasing company has separate tier of minimum equity of Rs. 200 million and the company is incorporated as a public limited company under the Ordinance. The company has to allow at least 15% of the paid up share capital to the promoters to have to undertake that they shall not dispose of their share for a minimum period of 3 years from the date of commencement of business except with the prior approval of the Commission. Other conditions regarding to the appointment of Chief Executive, Change in the Memorandum of Association and Board of Directors cannot be made without prior approval of the Commission.
A Company licensed by the Commission to undertake leasing business shall invest at least 70% of its assets in the business of leasing unless it is duly licensed by the Commission to undertake any other form of business in addition to leasing. Cash and bank balances investment in government securities shall be excluded to calculate investment in leasing business for purposes of this definition. It has to provide facilities amounting to at least 5% of its funds based facilities to small entrepreneurs. It has also to acquire and maintain membership of Leasing Association of Pakistan and follow the code of conduct prescribed by the said Association.
The leasing company shall not hold, deal or trade in real estate except for use of itself and engage in leasing operations pertaining to open land, buildings other than factory buildings, warehouses, hospitals, educational institutions, office buildings and residential undertakings located within and outside factory premises to be used exclusively as such by a lessee, may be leased subject to a maximum of 120 square feet per employee provided that such investment does not exceed 20% of the overall lease portfolio of the company and furniture or furnishing of any type. In nutshell the NBFC's (Establishment and Regulation) Rules 2003 apply to all functions of the leasing companies.
Under the provisions of Section 121 (K) of the Companies Ordinance 1984, every mortgage or charge or other interest based on hire-purchase or lease agreement for acquisition of fixed assets are void, if not registered.
For an application to the Commission seeking permission to establish a leasing company, a non refundable processing fee has to be paid at Rs. 100,000 under clause IX of the Sixth Schedule of the Companies Ordinance 1984.
According to the Transfer of Property Act, 1882 a Lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms.
The transfer is called the lessor, the transferee is called the lessee, the price is called the premium, and the money share, service or other thing to be so rendered is called the rent.
Transfer of right to enjoy immovable property;
The duration of the right of enjoyment must be fixed;
It must be for consideration either premium or rent or both; and
The transfer must be accepted by the transferee.
According to the provision of Section 106 of Transfer of Property Act, 1882 in the absence of a contract or local law or usage to the contrary, a lease of immovable property for agricultural or manufacturing purposes shall be deemed to be a lease from year to year, terminable, on the part of either lessor or lessee, by six month notice expiring with the end of a year of the tenancy; and a lease of immovable property for any other purpose shall be deemed to be a lease from month to month, terminable, on the part of either lessor or lessee, by fifteen days' notice expiring with the end of a month of the tenancy.
Every notice under this section must be in writing signed by or on behalf of the person giving it, and either be sent by post to the party who is intended to be bound by it or be tendered or delivered personally to such party, or to one of his family, or servants at his residence, or (if such tender or delivery is not practicable) affixed to a conspicuous part of the property.
A licence confers a right to do or continue to do something in or upon immovable property of grantor which but for the grant of the right may be unlawful, but it creates no estate or interest in the immovable property of the grantor. A lease on the other hand creates an interest in the property demised.
According to the Section 107 of the Transfer of Property Act, 1882 a Lease of immovable property from year to year, or for any term exceeding one year, or reserving a yearly rent, can be made only by a registered instrument.
All other leases of immovable property may be made either by a registered instrument or by oral agreement accompanied by delivery or possession.
Where a lease of immovable property is made by a registered instrument, such instrument or, where there are more instruments than one, each such instrument shall be executed by both the lessor and the lessee.
Provided that the Provincial Government may, from time to time, by notification in the official Gazette, direct that leases of immovable property, other than leases from year to year, or for any class of such leases, may be made by un-registered instrument or by oral agreement without delivery of possession.
There can be no lease without a present demise. A mere agreement to grant a lease in future will not be a lease. Such an agreement will merely create a personal right and not an interest in the property. It is a matter of construction in each case whether the agreement is merely an executory one or a person demises and creates an interest in the property. The mere fact that an agreement provides that the lease is to commence from a future date or that there is a provision for the execution of a formal document does not make it a merely executory agreement and not a lease. Even where possession is allowed to be taken under the agreement it may amount only to a personal agreement not creating any present interest in the property, the right to take possession pending the grant of the lease being, in such cases, only a licence. But the circumstances of the case may show that apart from the lease that is agreed to be granted, there is another tenancy arising by implication from payment and acceptance of rent.
Ordinary leases at rack-rents are not generally preceded by a formal agreement, such as is common on a sale of land, or by an investigation into the lessor's title. As a rule the principal terms are arranged between the parties, and embodied with various ancillary provisions in a draft lease, which is prepared by the lessor's advices and submitted to the lessee, the ultimate form and contents of the instrument being adjusted by negotiation. If an intending lessee desires to examine the title he must make an express bargain to that effect, for under a contract to grant a lease the intended lessee is not entitled, in the absence of such express stipulation, to call for the title to the free-hold. By the Real Property Act, 1845, leases required by law to be in writing are void at law unless made by deed.
There are reciprocal covenants to be undertaken by the lessor as well the lessee to be entered in the deed of lease.
The following are the implied covenants on the case of a Leasee:
To disclose material defects enhancing the value of the lessor's interest;
To pay rent;
To keep and restore the property leased in good condition, reasonable wear and tear and damaged by irresistible force excepted;
To permit lessor and his agents to inspect the property;
To inform lessor of any attack of a stranger on lessor's title;
Not to commit waste or use the property for a purpose other that that for which it is let; and
Not to construct.