An EFA is a single document used to document a loan transaction, which includes the note, security agreement and loan agreement all in one. Carefully drafted, it will be very similar in form to a lease (master or one-off) but covers all legal requirements for a complete loan package.
According to recent statistics, only one-quarter of “leases” in this country are “true leases.” The other 75% of leases are dollar-out leases, dirty leases, financing leases, leases intended as security, disguised security interests, non-tax leases, ALIAS’s or whatever other term you use to refer to a lease that is essentially a secured loan. Nevertheless, our industry has relied on lease language in financing documents for more than half a century.
Problems Caused by Confusion
Unfortunately, there are numerous situations where judges, governmental agencies and others are confused by these “leases,” which are not, in fact, leases.
For example, there are “vicarious liability” laws that can make owners of personal property liable for injuries, which that property causes to third parties even if the owner did not behave improperly and was not negligent in any way. The fact that an equipment lessor, who is merely a financing source, is the owner of the property for tax or other purposes is sometimes sufficient for a lessor to be liable under these laws.
In most cases, judges have “followed the light” in holding that the “lessor” under a dollar-out or other non-tax lease is merely a secured lender and not an owner. However, there are exceptions to the rule. In Amba-An v. Arias-Turecious, 704 So. 2d 1093 (Fla. Ct. App. 1997), a lessor under a dollar-out lease of a motor vehicle was held to be liable under Florida’s dangerous instrumentality doctrine for damages caused by the negligent operation of the leased equipment by the lessee. The doctrine is supposed to apply only to owners of equipment and not secured lenders with merely a lien on it.
The District Court of Appeals held that, as a matter of law and despite the fact that the “lease” contained a dollar-purchase option, it was a “true-lease” and the lessor could be held liable under Florida’s dangerous instrumentality doctrine. In support of its findings, the court noted the agreement was entitled “Commercial Vehicle Lease Agreement” and the document stated that the lessor retained title to the truck.
Additional facts leading to the court’s conclusion included: 1.) interest was not specifically mentioned in connection with monthly payments, 2.) the lessee could not assign its interest in the lease without the lessor’s written permission, but the lessor could assign its interest at will, 3.) the lease required the lessee to carry liability insurance, 4.) the lessee was required to display signs, if asked, indicating that the lessor owned the truck and 5.) the lessee was required to return the truck in good operating condition if not purchased in accordance with the terms of the lease.
Although a fairly recent Federal Statute, the Graves Act, codified at 49 U.S.C. §30106, attempts to protect lessors with respect to motor vehicle vicarious liability statutes like the one addressed in the Amba-An case, there is some debate as to the effectiveness of that law. In addition, there are other theories of lessor liability not addressed by this Act.
The non-true lease also creates frequent problems with state and local taxing authorities. People running these offices routinely tax dollar-out leases as true leases. Of course, in the process of doing so, they tax the “finance charge” or money earned at the “implicit rate” of the lease as well.
The EFA
For these and other reasons, the Equipment Finance Agreement is becoming increasingly popular and may eventually replace the familiar non-true lease as the finance vehicle of the future. In short, EFAs are used to finance motor vehicles and other potentially dangerous equipment, to be clear that lessees/borrowers have title to the equipment when necessary for tax exemptions available only to the lessee/borrower and in other situations where non-true leases might create problematic ambiguities.
An EFA is simply a loan and security agreement by another name. Unlike a non-true lease, the transaction is stated to be in the nature of a loan or financing rather than a lease of personal property and an EFA is much clearer on its face as to the parties’ intention.
For example, a good EFA will be clear with respect to the following issues:
As a result of the foregoing clarifications, an EFA can provide significant protections over a non-true lease, particularly with respect to lessor liability and certain state tax issues. In addition, since it uses standard loan language, it is easier to work a traditional lending structure, such as a floating rate loan, into the documents.
At the same time, because the EFA does not include documents specifically labeled as “promissory notes” or “security agreements,” many lessors, under internal restrictions prohibiting the making of traditional loans, can close an EFA transaction. It is further distinguishable from traditional loan documents by being much more “equipment focused” like its equipment lease ancestor. The absence of a promissory note eliminates extra paper and, to a large degree, the EFA can be modeled on an existing lease agreement package so as to preserve familiar late fee policies, document modeling and other details.
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[…] A Little Something About EFA Documentation – An industry with a myriad of finance structures and even more colorful names (such as split TRAC’s, first amendment, leveraged, synthetic, dirty, finance, put and security leases) has added another — the Equipment Finance Agreement (EFA). […]