It seems that there are tax and accounting situations that lead strongly to structuring a transaction either as a real lease, or as an alias or as a Straight Loan. However, there are other considerations for transactions that are not motivated by tax or accounting concerns. This edition of Dispatches focuses on the latter. From a technical point of view, these provisions do not apply to genuine leases. Because of the difficulty in distinguishing between leases and actual loans, and the fact that the courts often analyze the subject inconsistently and incorrectly, most leasing companies treat all their transactions as if they were simply loans that challenge this issue. As a result, prudent lenders and lenders would often not see a significant difference between a lease agreement and a debt and security agreement with respect to their security silos. The difference in practice is that a real lessor, if he can save himself in a real leasing situation, by arguing that the rules of Article 9 are not applicable to him, but that in the event of a transaction on the reference note, he would not have such a defence. In her article, Jill also referred to a second situation where the distinction between genuine leases and security leases remains relevant: restructuring or restructuring under Part III of the Bankruptcy and Insolvency Act (the “BIA”) and the Corporate Credit Act (CCAA). The distinction between these real estate interests is important, especially when the owner/tenant of an asset files for bankruptcy. This is because the Bankruptcy Act applies different rights and obligations depending on the nature of the debtor`s shares in the property. Bankruptcy courts are often asked to determine the exact nature of the debtor`s legal interests.
The Seventh Circuit Court of Appeals recently addressed this issue. In United Airlines, Inc. v. HSBC Bank USA, N.A., the Court of Appeal held that a court should consider the content of a transaction and not its form in determining whether a transaction is a “genuine lease” or a disguised guaranteed financing. On the contrary, in the context of a lease agreement (whether it is a real lease or an alias), there is generally no principal balance indicated in the provisions of the text of the document.