The type of finance agreement is a relevant factor for a court in deciding whether or not to grant the user of the asset relief from forfeiture by the owner. The duration of the lessee’s period of possession is also an important factor in deciding if the relief can be given.

The right of a finance company to recover the assets it leases out in the event that the customer does not pay is one of the basic terms of leasing. The finance company owns the asset and needs the right to recover it in the event of customer default in order to recover the cost of purchasing the asset and all the attendant interest and other costs in leasing the asset.

Equally, the user wishes to use the asset. The user has a contractual right of quiet enjoyment and, depending on the type of the finance contract, has expectations of becoming the owner, and has other quasi-proprietorial interests in the asset it is leasing. One such interest is the possible right to relief from forfeiture by the owner in appropriate circumstances.

What is relief from forfeiture? It is a remedy that the courts of equity (in England and Wales) can use to stop the seizure of assets by the owner of the assets where the user is in breach of covenants owed to the owner. The doctrine of relief from forfeiture applies to contracts where there is a transfer of proprietary or possessory rights in land or other assets to the user. As it is a remedy that exists in the inherent equitable jurisdiction of the courts, it will be used sparingly as the courts do not like to interfere with contracts that parties have made. There is no equivalent in Scotland. If there is a default then the rights of the owner to recover the asset are unrestricted, subject to the Insolvency Act in relation to administration.

In the recent case, Celestial Aviation Trading 71 Limited –v– Paramount Airways Private Limited [2010] EWHC 185 (Comm), Mr Justice Hamblen has given guidance on the issue of relief from forfeiture. The case itself concerned Celestial leasing aircraft to Paramount by way of operating lease. The lease allowed Paramount to use the aircraft for 8 years of their 20-30 years of usable life and they then had to return them to Celestial with no right to purchase at any time in the lease period. The termination provisions of the lease agreement required redelivery of the aircraft back to Celestial.

In the circumstances of the case, the Judge said that whilst the lease agreement transferred possessory rights, it did not transfer any proprietary rights to the user. The Judge classified the agreement as an operating lease, and whilst it gave possessory rights it did not give proprietary rights. He said “For the relief jurisdiction to apply to contracts transferring a bare possessory right for only a proportion of the economic life of the chattel would represent a major extension of the existing authority”. He was not prepared to extend the jurisdiction to give relief in this case. He went on to say: “The Lessor, having a reversionary right to the asset, needs to know and agree with precision with the Lessee: (a) the obligation of each party; (b) the events that will entitle the Lessor to terminate the contract and recover its asset; and (c) provisions which show how, as a matter of business practicality, the contract will be terminated, the asset recovered and possession returned by the Lessee to the Lessor.”

This case rounds off the approaches of the courts to the relief on forfeiture in relation to the various types of asset finance contracts. For other types of asset finance contract, the relief may be available:-

Goker –v- NWS Bank plc [1999] GCCR. This case concerned a “deferred payment agreement” or more basically a hire purchase agreement. The parties conceded that the court could grant the hirer relief from forfeiture in hire purchase agreements. But, as the hirer failed to pay instalments relief was not granted. The court considered the nature of the asset, a car, which is mobile and depreciates quickly, were also reasons that the relief was not given in the case.

Transag Haulage –v- Leyland DAF Finance plc and Another [1994] BCC 356 . This dealt with three hire purchase agreements which had been terminated by the financier due to the appointment of an administrative receiver in respect of the hirer. However, in this case, the payments had been kept up to date by the hirer. The termination of the contracts meant loss of the hirer’s proprietary right which was the option to purchase the vehicles at the end of the hire period. In this instance, the relief was given. The court said that it would “not grant relief unless [the court was] satisfied that the terms upon which it was granted would confer upon the owner at least as valuable rights as the owner would have enjoyed under the original agreement. In addition, [the court] would not grant relief unless [the court] was satisfied that failure to do so would confer a substantial windfall on the owner over and above what the original agreements provided for the owner to receive. Finally, [the court] would not grant relief if [the court] considered that the conduct of the hirer had disentitled it to receive it.” In the case, the hirer had paid nearly all the instalments and the value of the vehicles was greater than the termination sum. These reinforced the decision to grant relief from forfeiture.

On Demand Information plc and Another –v- Michael Gerson (Finance) plc and Another [2003] 1AC 368. This case concerned four finance leases of video and editing equipment. Of those finance leases, two were in secondary period, one was within a few weeks of expiry and the fourth had three months of the primary period to run. They were all terminated due to the appointment of an administrative receiver in respect of the hirer, On Demand Information. Moreover, the equipment had, in fact, been recovered and sold. However, had the leases continued then the lessee under the finance leases was entitled to 95% of the sale proceeds as a rebate of rentals.

In this case the relief from forfeiture could not, in fact, be granted given the sale of the equipment, but the sale proceeds were held in an escrow account. The House of Lords’ view was that the lessee would have been entitled to relief from forfeiture but as the court could not give effect to that relief, the equipment having been sold under court order, then the court would give effect to the rights that the lessee would have had under the finance leases by ordering the appropriate division of the sale proceeds. That is, in the circumstances, the hirer would have been entitled to relief from forfeiture. It had valuable contractual rights in relation to the 95% of the sale proceeds and the court would have given effect to those rights had the agreements run their course and the equipment not been sold. The court took that view that the rights are of a quasi-proprietary nature.

The courts will be minded to grant relief where the hirer has some valuable contractual right which would otherwise be lost. These can be rights of a “proprietary” nature, such as the option to purchase or valuable economic rights such as 95% of sale proceeds. But these would not normally apply in operating leases where the hirer only uses the asset for a period of time and has no expectation of any proprietary rights.

However, the conduct of the hirer will also be relevant in the court’s decision whether or not to grant relief from forfeiture. In all cases, the relief, which is only an equitable right, can be lost if the hirer has not behaved correctly and in accordance with the terms of the finance contract. A major reason for loss of the right to claim relief was the hirer’s failure to pay the rentals.

The two cases where the hirer was successful in claiming the relief were in circumstances where termination of the finance agreement had come about due to the appointment of an administrative receiver. This office has been largely abolished and the most common method of a hirer being in default (other than non-payment) is due to the appointment of an administrator. A hirer in administration is protected by the provisions of the Insolvency Act which prevents the enforcement of contracts against the company in the course of administration, and as financiers know, they cannot recover their assets in those situations without a court order. That applies in the whole of Great Britain.