Leasing farm machinery - disputed arrangements

The considerable upfront cost of modern farm machinery means that commercial leasing agreements are now commonplace. Whilst a commercial necessity for many farming businesses, there are a few things to consider before going ahead, and to keep in mind if things go wrong.

There are a number of leasing agreements available which have different practical consequences for the parties - including finance leases, hire purchase agreements, operating leases, retention of title and, sale and leaseback, and we examine just a few, below. The particular terms of the arrangement will affect both the lender and the farmer's obligations and rights relating to the machinery, so it is sensible to seek advice if and when problems arise.

In most leasing arrangements, and notwithstanding the true legal ownership (which often sits with the lender), the farmer bears most of the risks and rewards associated with ownership of the machinery. Whilst the machinery is in the farmer's possession s/he will usually be responsible for insuring and maintaining it and will be liable for any loss/damage caused to it.

Finance lease

In a typical finance lease, the manufacturer sells the machinery to a third party (usually a bank/lender) for an immediate payment and the lender enters into a lease agreement with the farmer. The farmer then pays the lender rental payments reflecting the cost of the machinery plus a return on capital (similar to interest). The farmer will never own the machinery but will have the use and possession of it, and will be liable for maintenance/upkeep.

What happens at the end of the lease period (usually once the machinery is at the end of its working life) will depend on the particular contract between the lender and the farmer. The farmer might be entitled to continue to rent for a nominal sum, return the machinery to the lender for sale, or sometimes sell the machinery on behalf of the lender (in other words, as the lender's agent). In the latter case, the farmer may be entitled to retain some of the sale proceeds as reimbursement for rents paid, although again, this will depend on the particular terms.

Hire purchase agreement

In a hire purchase agreement the farmer will usually own the machinery at the end of the arrangement. The lender leases the machinery to the farmer, who makes regular repayments and then at the end of the hire period, the farmer has an option, but usually not an obligation, to acquire the machinery for a specified sum.

What if things go wrong?

If issues arise (say, regarding a machinery breakdown or damage to the equipment) it is worth speaking to a disputes lawyer to ascertain the extent of your obligations under the agreement (and the legislative framework). A farmer will often be obliged to continue making the repayments whilst any defects in the machinery are being fixed (and pay for the repairs - depending on whether manufacturer's guarantees/warranties are available), even though s/he won't be able to use it in the meantime. The dispute may become more complex if the machinery cannot be repaired or repair costs outweigh the value of the asset. Often, such arrangements are categorised as "business to business" transactions and so the enhanced protections contained in consumer rights legislation might not apply.

The underlying terms of the arrangement and legislation (in particular the Sale of Goods Act) will also affect the rights of an innocent purchaser of machinery subject to a prior leasing agreement. You should think about speaking to a disputes lawyer if you have purchased equipment second hand which turns out to be affected by an earlier lease agreement.

For more information, please contact Rory Mac Neice.