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Lecture

BU451 Lecture Notes - Quantum Meruit, Finance Lease, Net Lease


Department
Business
Course Code
BU451
Professor
Charles Davidson

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Chapter 17: Leasing and Bailment
Leasing
- Spectrum of Leasing:
o True Lease Lease with genuine bona fide option to buy Lease with “option” Sale
with VTB (Vendor Take Back Mortgage) Conditional Sale Purchase
Lease with “option”: after the term, you only pay a nominal fee to purchase
It’s different from a Sale because it shows up differently on a balance sheet
However, if it looks like a duck, quacks like a duck, sounds like a duck, it
IS a sale! So even though they don’t think title passes, it has passed at
the signing of the contract, so the vendor’s interest is gone
Sale w/ VTB keeps a security interest with vendor, so if customer is bankrupt
vendor gets it back
If the security interest isn’t registered with the PPSA, it is unenforceable
Def’n: Gross Lease: everything’s included in the rent
Def’n: Net, Net, Net lease: here’s base rent, and any additional expenses that the landlord incur will be
additional rent for the tenant
- If it’s a lease that deals with land (ie retail premises), want to register in the Land Registry
system this makes the lease binding in anyone who stands in yours or your landlord’s shoes
LOOK ALL THESE UP TO DETERMINE WHEN TITLE PASSES AND TO WHOM IT PASSES TO
- Hire-purchase = an agreement to lease an item of property with an option to purchase at the
end of the stipulated term
- Important terms:
o Duration
o Rent
o Insurance/other costs payable by Lessee
o Purchase Option
o Early Termination minimum payment
- Implied “quiet possession” on the lessor a warranty that they won’t interfere with lessee’s
possession of the asset
- Implied warrantee of fitness (item does what it was leased to do)
- Right of the Lessor:
o Sue for unpaid rent
Even if we win in court, we’re an unsecured creditor
o Sue for damages for loss
- Right of Lessee:
o Quiet possession, warrantee of fitness

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Operating (true) Leases
- No intention to transfer ownership; term is relatively short
Purchase Leases
- Important tax implications (owner gets to claim depreciation, is the rental payments deductible,
etc), plus leasing results in getting a lot more money out of the consumer
- Lessor may think that continued ownership until payment is full is more secure (they can’t just
stop paying, or else we take it back because title hasn’t passed)
o If title has passed, the trustee owns the widgets and sells them to repay creditors
- Lessee may like it better as off-balance sheet financing
- Regardless, leasing is better for tax-planning
Security and Finance Leases
- Security lease lessor provides the credit
- Finance lease 3rd person provides credit; becomes owner of the property and leases it to the
lessee
- Sale and Leaseback owner sells it and immediately leases it back from new owner
Bailment
- Transfer of possession of personal property without a transfer of ownership
- Can be involuntary (if a customer leaves a coat behind in a restaurant, they have to return it)
- Gratuitous bailment is where one party provides no consideration
Similar Transactions
- Sale: transfers ownership, but maybe not possession opposite of bailment
- Trust: transfers possession to a trustee; does not create bailment it gives legal ownership to
trustee, and beneficiary acquires equitable interest in the subject of the trust
- Licence: no more than a grant of permission to use the licensor’s land
Sub-Bailment
- Sub-bailee someone who receives bailment of property from a bailee
Rights and duties of a Bailee
- Burden of proof is on bailee to show they weren’t negligent; consequently it may be easier for
bailor to sue under the rules of bailment than the rules of tort
- Standard of care depends on the type of bailment (gratuitous for the benefit of bailor, etc)
o Depends on type of good (expensive? Fragile?)
Rights and Remedies

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- Quantum meruit: an amount a supplier deserves to be paid for goods or services provided to the
person requesting them (aka fair market value of the benefit conferred)
o If a carrier contracted bailment, but cannot complete their part because the bailor only
delivered part of the goods, the carrier can sue quantum meruit for the value of what
they have done
- Another remedy is a lien on the bailed goods
o Bailee can retain possession until bailor pays what is due
Lien is a possession remedy: when bailor obtains possession of goods, they lose
the lien
- If bailor ultimately cannot pay bailee to get back his goods, bailee has right of sale
Types of Bailment
- Storage and safekeeping:
o Fungible goods: goods that may be replaced with different but identical goods
- Repairs and Work on a Chattel
- Transportation:
o Private vs. gratuitous vs. common
Burden of proof from lowest to highest ^
o Common carrier works for public to transport goods for a reward (ie. Railway company)
Must indemnify bailor against loss whether it’s the carrier’s fault or not
Only available defences are:
o Act of God
o Inherent vice in the goods
o Default by the shipper
- Innkeepers:
o Liable for loss or theft of goods (in addition to negligence)
Can avoid liability if it can show it was the fault of the guest
- Pledge or Pawn:
o Is a bailment as security for repayment of a loan
o Borrower is pledgor and creditor the pledgee
o A pledgee Is a bailee for value; obtains a lien on the property
Chapter 19: Agency and Franchising
Agency
- Agent: person acting for another person in contractual relations with third parties
- Dependent agent works for 1 principal (ie. Insurance salesman) vs. independent agent works for
a number of principals (ie. Lawyers)
- Anyone who has capacity to contract may appoint an agent to contract on his behalf
o Agent’s power is limited to the power of the principal
- If agency agreement is extended beyond one year, it must be in writing to be enforceable
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