Finance Leasing Manual - FLM30.01

Part I Schedule 12 FA 1997: object of the purchase option

In an 'income-into-capital' scheme the Borrower wants (in substance) to borrow money. In broad terms, it does this by selling an asset for a capital sum and buying it back at the end of the 'loan' period. The Borrower gets cash at the outset and repays it when the option is exercised.

In the case of real property, to obtain the 'loan', the Borrower can do one of three things:

• sell its freehold interest to the `Bank`; or

• grant an estate out of its freehold interest to the Bank, usually a 'long' lease (more than fifty years);

• grant a leasehold interest out of its (longer) leasehold interest.

In the case of other property (such as chattels machinery and plant where the kit is not part of a real property interest) the Borrower will sell his entire interest in the asset.

The amount Bank pays (as the option price) to Borrower for the interest in the asset is the amount of money it 'loans' (this is the substance, not the legal form, of the deal).

The Bank may be:

• a bank; or

• a subsidiary of a bank which is:

• a company not associated with a bank.

The normal case is that the lessor is generally an investment company which is a subsidiary of a major bank.