Comparison of Financial Leasing Agreements and Sale Agreements with Retention of Title According to Turkish Law

Authors: Atty. Ahmet Berker & Atty. Ayça Berker

I. Introduction

Although Financial Leasing Agreements and Sale Agreements with Retention of Title are significant financial instruments for both parties, they have distinct legal and commercial characteristics. These two types of contracts are frequently used when financing businesses and commercial activities, containing substantial differences regarding the rights and obligations of the parties.

II. Financial Leasing Agreements

Financial Leasing Agreements typically involve the long-term leasing of an asset or equipment. An agreement of this type is executed by transferring the ownership of the asset from the lessor (financial leasing company) to the lessee. While the lessee holds the right to use the asset, its ownership remains with the lessor. However, a notable feature of financial leasing is the possibility of transferring ownership to the lessee at the end of the lease term. This transfer generally occurs upon payment of the leasing fees throughout the term and a final installment.

During the period the leased asset is used by the lessee, its ownership remains with the lessor. However, the lessee shall continue to bear the costs due to payment obligations. The agreement may conclude with the sale of the asset, depending on the lessee’s desire to pay the asset’s full value.

III. Sale Agreements with Retention of Title

A Sale Agreement with Retention of Title is a type of contract where the ownership of the asset remains with the seller until the full purchase price has been paid.

In such an agreement, while the buyer has the right to use the asset, ownership does not transfer until the purchase price is fully paid. In other words, the buyer can use the asset, but ownership rights are not transferred unless certain conditions (usually payment obligations) are fulfilled.

An agreement of this type may trigger a mechanism where the asset is returned to the seller if the payment process is not completed. Retention of the title helps the seller secure their claims. Furthermore, if the buyer fails to pay, the seller has the right to reclaim the asset.

IV. Key Similarities and Differences Between the Agreements

Ownership and The Right to Use

• In Financial Leasing Agreements, the ownership of the asset remains with the lessor, while the lessee has only the right to use it.
• In Sale Agreements with Retention of Title, ownership of the asset remains with the seller until the full purchase price is paid, while the buyer has the right to use the asset.

Purpose and Structure of the Agreements

• Financial Leasing Agreements grant the lessee long-term usage rights and the potential to acquire ownership of the asset in the future.
• Sale Agreements with Retention of Title secure the seller’s claims while granting the buyer the right to use the asset. Ownership transfer only occurs upon full payment.

The Form of the Agreements

• Financial Leasing Agreements must be executed in writing. If the subject of the agreement is an immovable property, this must be recorded in the annotations section of the relevant registry.
  • For movable properties with a specific registry, the agreement must be registered in the relevant registry.
  • For movable properties without a specific registry, the agreement must be registered in the special registry maintained by the Association of Financial Leasing, Factoring, and Financing Companies. All such transactions must also be reported to this Association.
• Pursuant to Article 764/I of the Turkish Civil Code, the agreement must be formally executed for the retention of ownership in movable properties to be valid. Furthermore, the retention of ownership must be recorded in the Registry for Retention of Title maintained by the notary office of the buyer’s place of residence, as this registry has a constitutive effect.

Terms of Payment

• In Financial Leasing Agreements, the lessee makes regular payments. At the end of the lease term, the ownership of the asset may be transferred.
• In Sale Agreements with Retention of Title, the buyer has the right to use the asset, but ownership remains with the seller until full payment is made. If payment is not completed, the seller may reclaim the asset.

Applicability

• Sale Agreements With Retention Of Title apply only to movable properties.
• Financial Leasing Agreements may apply to both movable and immovable properties.

V. Conclusion

While Financial Leasing and Sale Agreements with Retention of Title may appear similar in that they both involve the use of an asset, they differ significantly in terms of ownership and payment terms. Both types of contracts offer different mechanisms for regulating the procurement of assets and payment obligations in commercial activities. Each has its advantages and disadvantages, depending on the financial and operational needs of the parties involved.

 

If you would like to know more on this matter or require legal assistance, please get in touch with BerkerBerker Law Office via info@berkerberker.com or any other contact information listed at our website.