Finance Leasing Manual - FLM13.36

Sale and leaseback: application of sale proceeds: associated arrangements

In some cases there may be arrangements, associated with sale and lease-back, which prevent the lessee from using the sale proceeds as it sees fit in its business. For example:

• the greater part of the funds may have to be placed in an account with a bank associated with the finance lessor on terms whereby the deposit has to be used to make or back rental payments under the lease;

• alternatively, the finance lessor may require a guarantee from a party independent of the lessee (in practice another bank) that the rentals will be paid and that guarantee obtained by means of a similar 'collateral deposit'.

There are a number of other variations on 'defeasance arrangements', as they are sometimes called, of this nature. Where the sale and lease-back is of machinery or plant and takes place on or after 2 July 1997, Section 76A(6) CAA 1990 (introduced by Section 46 F(No2)A 1997) is in point, but other arrangements may be vulnerable under more general law. If in dealing with a lessee you come across arrangements of this nature please do not agree the lessee's computations but instead report the case to Special Investigations Section.