In Denmark sale and leaseback is a rather new type of arrangement grown out of the immense progress linked to financial lease. Gaining ground during the past many years, companies are now using sale and leaseback to a great extent and there are several sound reasons for a company to enter into such arrangements.
Focusing only on chattel (movable property) in this article, sale and leaseback is an arrangement in which a company sells an asset to a company that immediately leases the asset back to the seller. The company that sells the asset becomes the lessee, and the company purchasing the asset becomes the lessor. In this type of arrangement the lessor is typically a leasing company.
The asset subjected to the sale and leaseback is kept in the possession of the lessee during the entire transaction, and the details of the lease agreement are arranged for a specific period of time as well as a set payment rate.
One of the main purposes of sale and leaseback is to free up cash tied into the asset while at the same time allowing the lessee to retain the possession and use of the asset. By doing so, the lessee is able to use the money invested in the asset for other investments. Additionally, the parties are likely to derive fiscal benefits from the arrangements as well.
Despite this progress, however, sale and leaseback has been and still is subject to some uncertainty as to the legitimacy of the arrangement. This uncertainty is caused by the fact that there are several remarkable similarities between sale and leaseback arrangements and a certain Danish arrangement known as “møbellån”, which is a type of arrangement somehow comparable to an unsecured chattel mortgage.
Due to this similarity there is a probability that a sale and leaseback arrangement will be overruled and reclassified implying that the lessor will not be able to enforce his ownership of the asset. Subsequently, the lessor is likely to be deprived of his privileges as secured creditor if insolvency proceedings are commenced against the lessee.
Although the Danish High Court has determined that sale and leaseback can be an ordinary and legally financial instrument for companies, the arrangement is likely to be reclassified, however, if the lessor is able to prove that he has a legitimate fiscal or commercial interest in the sale and leaseback arrangement e.g., the arrangement is unlikely to be reclassified.
Whether a sale and leaseback arrangement is maintained or reclassified depends on a wide variety of criteria that differ from case to case.
Mikkel Wehner Kjær