Further information
The following information amplifies certain details contained in the Technical
Note published on 21 July. This information is published in response to
queries.
It should be noted that the final form of the proposed legislation will
be subject to Parliamentary scrutiny and may differ from the Technical Note
and this amplification of its contents.
This page was last updated on 05 August 2005.
1 Meaning of ‘existing agreement’
1.1 The requirement for an 'existing agreement' to be in place is intended to establish that a commercial consensus existed as at July 20 between the two principal parties to the proposed lease. Evidence to show this consensus must exist in writing made on or before 20 July. Letters, emails or more formal documents could all be used to show what had been agreed by 20 July.
1.2 The existing agreement does not have to be binding on either party.
1.3 The existing agreement does not have to be a single document, nor does it have to be signed by lessor and lessee.
1.4 For these purposes, an agreement can be reached with a lessee (or lessor) if it is reached with a person controlling the lessee (or lessor). For example, an agreement between a lessor and the parent of the identified lessee would, in commercial substance, be equivalent to an agreement with the lessee and would be accepted as an agreement with the lessee.
1.5 As long as it is identified, a prospective lessee (or lessor) does not have to exist when the existing agreement is reached. In this situation the existing agreement would need to be reached with the person (or persons) who will control the lessee (or lessor).
2 Description of assets
Type of asset
2.1 The Technical Note explains that the existing agreement must include details of the asset to be leased and that the final lease must not be materially different from the existing agreement. The requirement to describe the asset will be met if the existing agreement describes a type of asset in sufficient detail to identify it.
2.2 For example, the existing agreement might be an arrangement for financing all the fixtures in a building that is currently under construction or refurbishment. The requirement to describe the asset will be met if the fixtures are described in project documentation seen by the potential lessor.
2.3 Given that the fixtures in a building are unlikely to be a single asset, the conditions in paragraphs 35 and 36, as amplified in paragraphs A9 to A11 of the Technical Note would also need to apply.
2.4 In applying paragraphs 35 and 36 to a building it may be necessary to consider whether one part of a building could be used without another part, particularly if the building is constructed or refurbished sequentially. For example, if a building is refurbished in two stages, one after the other, then it may be necessary to consider each stage for the purposes of paragraphs 35 and 36.
3 ‘Under construction’
3.1 The transitional rules will only apply where the asset to be leased is under construction before 1 April 2006.
3.2 The word ‘construction’ is intended to take its ordinary meaning, that is, in essence, ‘to put together the parts of’ or ‘to make’. Therefore the concept of ‘under construction’ does not extend to cover the design phase.
3.3 The start of construction of a component destined for a particular asset might constitute construction of the asset although the start of construction of a component that could fit into a number of different assets would not. The construction of a large component (such as the wing of an aircraft) is more likely to be viewed as the start of construction of ‘the asset’, than is the construction of a minor component such as seats or instrumentation. The facts would need to be examined to see whether in a particular case the asset was ‘under construction’ or not.
4 Not materially different
Value of assets
4.1 In considering whether the final lease is not materially different from the existing arrangements the value of the asset(s) may need to be considered. An increase in costs that reflects an increase from estimates made at the date of the existing agreement is unlikely to make the final lease materially different from the existing agreement.
4.2 In contrast, if the increase in costs reflects a change in the nature of the assets to be leased then there might be a material difference from the existing agreement. It would depend on the details of the particular case, particularly the degree to which the assets that are finally leased are different from those described in the existing agreement.
4.3 It is, however, the final lease – taken as a whole – that must not be materially different from the existing agreement for the transitional rules to apply. All the facts would need to be taken into account before coming to a final decision.
