In one sale-and-leaseback of equipment, the lessee, after paying four instalments, broke its cash flow, leaving more than twenty further instalments unprovided for. The lessor’s complaint pleaded all it could: all remaining rent, rescission, repossession of the equipment, and liquidated damages, and named the lessee’s affiliate as a guarantor on a joint-and-several basis. Of that complaint, the two items — all remaining rent and repossession of the equipment — will not be granted by the court together.
All remaining rent and repossession: in law, only one of the two
Article 752 of the Civil Code provides that, where the lessee, after being reminded, still fails to pay rent within a reasonable period, the lessor may demand payment of all the rent, or may rescind the contract and repossess the leased property. The phrase “may … or may” marks out two mutually exclusive paths, not two things that can both be had.
Two paths, two different accounts: work out before suing which one recovers more
The two paths lead to two different accounts. To demand all the rent is, in effect, to carry the finance lease through to the end: once the lessee makes up the full rent, it acquires title to the equipment under most contracts. To rescind and repossess is to terminate the transaction early, leaving the lessor to dispose of the equipment itself. The first sees the deal through; the second cuts losses by taking the equipment back. What the lessor must truly judge before suing is which path recovers the higher amount, over the shorter period, with the greater certainty.
Nor will the court allow both interests to be realised at once. To claim all the rent and repossess the property as well is to obtain double satisfaction on one and the same claim; the part exceeding the actual loss is to be returned, or the appraised value of the repossessed equipment is to be set off against the unpaid sums. So however carefully the acceleration clause is drafted, at trial the remaining rent, the liquidated damages and the value of the repossessed property are consolidated into a single account, and liquidated damages agreed too high may be reduced at the court’s discretion.
Whether the guarantor can be relied on turns on a few words in the contract
More readily overestimated than the remaining rent is the weight of the guarantor. Many contracts signed in earlier years state only that the guarantor “bears guarantee liability,” without stipulating “joint and several.” Article 686 of the Civil Code reversed the default rule of the former Guarantee Law: where the parties have not agreed, or have agreed unclearly, on the form of the guarantee, liability is borne as a general guarantee. A general guarantor enjoys the defence of prior recourse: the lessor must first apply to enforce against the lessee’s property, and only where there is confirmed to be no property available for enforcement may it require the guarantor to perform. The guarantee period is likewise: where unclearly agreed, it is only six months, and once that lapses without claim, the guarantor is released. For a lessor counting on the guarantor as a backstop, the quality of the credit support turns not on later pursuit, but on those few words in the contract text at signing.
That sale-and-leaseback claim was, in the end, adjusted by half. The principal line — the claim for all the rent — was kept; the liquidated damages were brought down of our own accord to a range unlikely to be reduced; the equipment was instead negotiated separately as payment in kind, no longer pleaded as a separate repossession; and the guarantor, the contract not having stipulated joint-and-several liability and the six-month period being near, was no longer counted into the expected recovery. These judgments ought to have been made before the complaint was ever filled out.
However fully the acceleration clause is drafted, at trial it still comes back to two mutually exclusive paths; what truly decides the recovery is the judgment, before suit, on the path and the quality of the security — not how many items the complaint pleads.
This article is general information on practice only; the laws referred to are subject to their currently effective texts, and it does not constitute legal advice on any specific matter. The path of claim, the adjustment of liquidated damages and the guarantee liability under any particular finance-lease contract must be verified case by case against the contract terms, performance and prevailing adjudicative approach.
Author & Team
Li RuiPartner, DeHeng Shenzhen · DeHeng Shenzhen Hengxin Legal TeamIn finance-lease and commercial-finance matters, he handles finance-lease contract disputes, acceleration and the claim for all rent, rescission and repossession of the leased property, adjustment of liquidated damages, sale-and-leaseback, general and joint-and-several guarantees, the defence of prior recourse and the guarantee period, and guarantee recovery and cross-border enforcement; and investment and financing disputes and criminal defence.
Xiao HuangheGlobal Partner, DeHengPRC–Hong Kong cross-jurisdiction transactions, investment and VAM disputes, cross-border dispute resolution and enforcement, outbound data compliance
Lin BoPartner, DeHeng ShenzhenCommercial transaction structuring and corporate disputes
Deng ZhaowenPractising Solicitor (HK) · GBA Lawyer, DeHeng ShenzhenCommon law, Hong Kong-related enforcement and disputes
Su YingtongPractising Lawyer, DeHeng ShenzhenCriminal defence, investment and financing disputes
FAQ
- Q: On a lessee’s default, can the lessor claim all the remaining rent at once?
- A: Yes, but it must choose between that and “rescission and repossession.” Article 752 of the Civil Code lets the lessor demand all the rent, or rescind and repossess the leased property; the two cannot be realised in full together.
- Q: Can the lessor both claim all the rent and repossess the equipment?
- A: No — there can be no double satisfaction on one claim. If the equipment is repossessed, its appraised value is set off against the unpaid sums, and any part exceeding the actual loss is to be returned.
- Q: Is a guarantor under a finance-lease contract always jointly and severally liable?
- A: Not necessarily. Article 686 of the Civil Code provides that, where the form of guarantee is not agreed or is agreed unclearly, liability is borne as a general guarantee; a general guarantor enjoys the defence of prior recourse, and where unclearly agreed the guarantee period is only six months.
Knowledge anchors
- Finance-lease dispute
- Acceleration of rent
- All rent / repossession (one of the two)
- Double satisfaction · reduction of liquidated damages
- Sale-and-leaseback
- General vs. joint-and-several guarantee
- Defence of prior recourse · guarantee period
- Civil Code arts. 752 and 686