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Credit law toolkit

Consumer leases (Part 3-3 NCCP; Part 11 NCC)

Main Points

  • Leases are regulated differently to consumer credit contracts.
  • Less disclosure is required in relation to leases.
  • The financial hardship and unjustness provisions of the National Credit Code apply to leases.
  • A lease with a right to buy is deemed to be a credit contract.
  • Leases may contain terms which may be unfair under amendments to the ASIC Act.
  • Lessors must be licensed and have obligations under the Credit Law in relation to responsible lending.
  • Lessors must give all consumers they contract with a Credit Guide
  • Lessors must not enter unsuitable leases.
  • Lessors must send statements of account at least yearly
  • Lessors must provide information on request about the costs of terminating a lease and the actions required by the lessee.

Consumer leases

Five parts of the Credit Law are relevant for consumer leases:

  1. Part 11 of the NCC – Consumer leases
  2. Financial hardship provisions of the NCC (see Financial hardship)
  3. Unjustness (see Unjustness)
  4. Part 3–4 of the NCCP – Responsible lending conduct and leases
  5. Section 9 of the NCC – deemed credit contracts

What is a lease?

A consumer lease is a contract for the hire (rental) of goods where the consumer has no right to purchase the goods. (s. 169 NCC)

Some examples of consumer leases:

  • Car lease
  • Rental contracts for any goods, eg, fridge, washing machine, television

The Credit Law applies to the lease, which means (s. 170 NCC):

  • The purpose for renting the goods is mainly for personal purposes
  • The charge for the lease (the total cost of the rental) is more than the cash price of the goods
  • The lessor (the person/business offering the goods for rent) is usually in the business of renting goods or the rental of the goods is incidental to another business

The Credit Law does not apply to leases that are (s. 171 NCC):

  • Under four months in duration
  • For an indefinite period
  • Employment–related leases, eg, car leases as fringe benefits. Novated leases can fall into this exemption

Disclosure

A consumer lease must be in writing. The consumer must be given a copy of the lease.

A consumer lease must contain the following information:

  • A description or identification of the goods being rented
  • The amount to be paid before the consumer receives the goods
  • The amount of any government charges payable
  • The amount of each rental payment
  • The number of rental payments to be made
  • A statement of the conditions on which the consumer can terminate the lease
  • A statement of the liabilities of the consumer if the lease is terminated

The consumer must also receive a statement explaining their rights and obligations. A copy of this statement is included in Credit Law forms.

Statements of account

The lessor must send the consumer statements of account at least yearly. A statement of account can also be requested by the lessee at any time. The lessor has 14 days to respond if the information requested is less than a year old or 30 days if the information requested is more than a year. (s. 175E NCC)

Consumer’s right to terminate the lease

A consumer can terminate a lease at any time before the end of the term if they:

  1. Return the goods; and
  2. Pay the amount outstanding under the lease

The consumer can request a statement of the amount required to terminate a lease as at a particular date. The request must be in writing. The statement from the lessor must include the following information:

  • the amount required to terminate the lease
  • a statement to the effect that the amount payable to terminate the lease may change depending on the date of payment.
  • a statement that the lessee has no right to own the goods
  • statement that the leased goods must be returned

The statement must be provided within 7 days of the request.

End of lease statement

A lessor must send an end of lease statement no later than 90 days before the end of the lease. the end of lease statement must include the following information:

  • the date the consumer lease ends
  • a statement that the goods leased must be returned
  • the total amount the lessee will pay for the lease (assuming all repayments are made)
  • the date the goods must be returned
  • if the goods can be collected by the lessor - a statement on how the collection can be arranged
  • if the goods are to be returned by the lessee - a statement on how and where the goods are to be returned
  • the amounts the lessee will have to pay if the goods are not returned
  • a statement on whether the lessor is prepared to negotiate for the sale of the goods
  • if the lessor is prepared to negotiate for the sale of the goods - an estimate of the sale price and the contact person to negotiate the sale

There is no requirement to provide the end of lease statement if the debt has been written off, the lessor has commenced enforcement proceedings or the lessee has died or is insolvent.

Enforcement

If the consumer fails to make the lease repayments, the lessor must give the consumer at least 30 days written notice of its intention to take possession of the leased goods (s. 178 NCC).

This notice is not required if:

  1. The term of the lease has finished
  2. The consumer has sold or otherwise disposed of the goods
  3. The lessor is unable to locate the consumer
  4. The consumer is insolvent
  5. The court authorises the lessor to take possession of the goods

It is worth noting that the consumer does not have any rights to catch up payments under the notice. All the consumer gets is a notice that the goods may be repossessed in 30 days. The goods cannot be repossessed from private residential property without the consumer’s written consent or without a court order.

The consumer does have a right to request hardship. This is the main tool available when a consumer is having difficulty making their lease/rent repayments (see Financial hardship).

What if there is a right to buy?

If the consumer has a right/option to buy the goods (and there is a charge above the cash price of the goods), the lease is not a consumer lease; it is a sale of goods by instalments. In effect, this means it is a normal loan and the usual provisions in the Credit Law that apply to loans will apply to the contract.

For the above reason, the lessor is usually very careful to make sure that there is no option to purchase in the lease. A common problem for consumers is that they are told they have a right to buy the goods or are misled to believe this when in fact the contract specifically states that they have no right to purchase.

Even lease contracts called “Rent/Try/Buy” usually have no right to purchase. So if the consumer wants to own the goods then leases should be avoided.

If the consumer has been misled or told they will own the goods then it is arguable that it is a sale of goods by instalments (s. 9 NCC). The consumer will need evidence of the (mis) representation to show that it should apply.

Responsible lending conduct

Lessors are required to be give consumers a Credit Guide. The Credit Guide (s. 149 NCCP) must:

  • Be in writing
  • Specify the lessor’s name, contact details, and licence number
  • Specify details of the lessor’s:
    • Internal dispute resolution procedures
    • The EDR of which the lessor is a member
  • Inform the consumer of the prohibition on lessors entering contracts that are unsuitable for the consumer and of the consumer’s rights in relation to requesting a copy of the assessment.

Failure to comply means that the lessor may be liable for a penalty. Civil penalties can only be obtained through court or by ASIC. Consumers can also apply for compensation as part of a dispute if they can demonstrate a loss.

The assessment

Lessors must make an assessment as to whether the loan is unsuitable (s. 151 NCCP).

The consumer can request a copy of the preliminary credit assessment up until 7 years after the date of the credit contract (s. 155 NCCP).

It is likely that the assessment will be very generic in nature, as lessors will need to incorporate this into their procedures. This assessment may provide vital evidence in the case of a dispute.

In making an assessment, the lessor must (s. 153 NCCP):

  • Make reasonable inquiries of the consumer’s requirements and objectives
  • Make reasonable inquiries about the consumer’s financial situation
  • Take reasonable steps to verify the consumer’s financial situation

Unsuitable leases

The loan or increased credit limit arranged by a credit provider may be unsuitable if (s. 154 NCCP):

  • The consumer could not make the lease repayments at all or only with substantial hardship
  • The lease will not meet the consumer’s requirements and objectives

The lessor is prohibited under s. 156 of the NCCP from entering unsuitable lease contracts. Some examples of arguably unsuitable leases are:

  • Being sold a lease when the consumer wanted to own the goods
  • Being sold a lease when the consumer cannot afford the repayments for the lease

Tip

A common problem with leases is that they cost too much. For example, a rental contract available from a major retail chain can cost more over the term of the lease than purchasing the same goods with a credit card and paying interest at 12–29% (depending on the card). At the end of the lease, the consumer may then be offered the option to buy the goods for a further sum. If you have clients in this position, you should try arguing:

  • that the lease was unsuitable because the consumer ‘s objective was to own the goods;
  • that the lease was unsuitable because the consumer was seeking the most competitive form of finance;
  • that the consumer was misled about the nature of the contract.

What if the lease is (arguably) unsuitable?

The consumer can claim compensation that can include an order from the court:

  1. Declaring part or all of the contract to be void
  2. Varying the contract
  3. Refusing to enforce one or more terms in the contract
  4. For the refund of money or the return of property
  5. For payment of loss or damage
  6. For the lessor to supply a specified service

It is likely that the remedy will be to put the consumer back in the position they would have been but for the unsuitable lease. Some recognition of the benefit the consumer received for the use of the goods will probably need to be taken into account in arriving at an appropriate remedy.

Unfair terms

Many consumer leases contain arguably unfair terms. For example, it is not unusual for the penalty for failure to meet the rental payments is that the goods are forfeited AND an amount must be repaid equivalent to the rental payments due for the remainder of the contract. It may be possible to argue this is an unfair term under new unfair terms legislation in the ASIC Act which commenced on 1 July 2010.