Leasing contracts: crucial decisions on prescription and default interest rates

Legal Insight

January 2023

George Psarakis LL.M. (mult.), PgCert

(republished from euro2day.gr)

Summary: In recent years, we have spent a lot of time on the issues and concerns that arise in credit from credit institutions. Businesses, however, also frequently make use of leasing. This article highlights two key issues in relation to leasing in terms of the statute of limitations on lease payments and the imposition of a default interest rate above the statutory limit.

In recent years, we have dealt a lot with the issues and concerns that arise in credit from credit institutions. Companies, however, often make use of leasing, which is a key financing tool due to the tax concessions provided by law on the one hand, the possibility of easier receipt of 100% of the investment (and not a percentage of it) on the other hand, because of the increased security of the leasing company (do not forget that in a bank loan the security is limited to a mortgage, for example, while in leasing, the financial institution retains ownership of the object of the security itself). 

In these contracts, two new issues have arisen in recent years within the courtrooms, which deserve comment:

A. First of all, and after so many years of the law on leases, our courts still have not resolved the issue of the statute of limitations on leases; there are court decisions that refer to a 5-year statute of limitations and others to a 20-year statute of limitations. A relatively recent decision of the Athens Court of Appeal (no. 5932/2020): "The general and specific purpose for which the above-mentioned short limitation period was established is also fully applicable to leasing, since the relationship between lessor and lessee requires a rapid settlement of the legal relationship between them and avoidance of disputes, and the circulation of the goods to which the lease refers cannot be made excessively difficult and while the lease has expired there are outstanding issues as to the consideration for their use. Besides, the five-year period and its fixed commencement date (Article 253 CC) is primarily for the benefit of the creditor, in this case the lessor, who, in carrying out commercial transactions, should not be burdened with so many different periods for the commencement of the limitation period for claims arising from them". The leasing companies, however, considering the 20-year limitation period to be correct, sometimes delay the legal action by filing the respective legal remedies even after the 10-year limitation period. This of course has a fundamental consequence: if it is accepted that the limitation period is 5 years, these leases cannot be recovered in court. Any attempts, therefore, to collect are successfully dealt with by the tenants' raising of the statute of limitations objection. 

Β. Another serious issue is the following: leasing companies have always considered themselves outside the supervisory regulatory framework with regard to the setting of the default rate. In particular, an Act of the Governor of the Bank of Greece (PD/TE 2393/1996) has been in force since 1996, which provides that the default rate (i.e. the interest rate charged on the arrears) may not exceed the interest rate on outstanding debt provided for in the relevant contract by more than two and a half percentage points per annum (2,5 %). Under this Act, however, the leasing companies were not complying and were therefore charging the default interest rate provided for lending between private individuals, i.e. currently 9.75% (!). Of course, in contracts where the legal interest rate under the above Act would be below 5%, for example, charging an interest rate of almost twice that (such as 9.75%) is a very large differential which, even allowing for potential compounding, over-inflates the debt. The Council of State in 2018 confirmed the position that leasing companies are also bound by the restrictions applicable to credit institutions in this regard, stating, inter alia, that: "It follows from this that leases, as 'credits' granted by leasing companies (i.e. by 'financial institutions', as defined in Art. 11 and 11(11) (i.e. "financial leasing companies", as defined in paragraphs 2(11) and 11(11)). 1 of Law No. 3601/2007), fall within the scope of Article 4(4)(a)(ii) and (iii) of Article 11(1)(a)(ii)(i)) of Regulation 3601/2007. 4 of Law No. 3601/2007 and, consequently, the interest rate on arrears on the rent due under leasing contracts is subject to the restrictions of PD/TE 2393/1996 and therefore may not, as stated in paragraph 4, exceed the interest rate on the outstanding debt provided for in the relevant contract by more than two and a half percentage points (2.5%) per annum' (Council of State, 727/2018). However, leasing companies continue, in some cases, when claiming debts (e.g. by issuing a payment order, etc.), to demand the interest rate on arrears between private individuals (i.e. 9.75%) and not the rate applicable to financial and credit institutions. This practice may result not only in the partial annulment of these judicial actions (partial annulment of e.g. of the payment order issued) but also the criminal liability of the executives for the offence of usury (and even at the level of a felony due to the fact that it was committed on a professional basis), since although they are aware of the above-mentioned decision of the CoE, they insist on claiming illegal interest in court (the 'pursuit' of usury benefits constitutes an attempt to obtain benefits also under the current Article 404 of the Criminal Code). Finally, I should add this: for a leasing lessee, a difference in the default interest rate of 5% or 6% may not be enough to endure a long litigation. But the leasing company, by this tactic, earns huge sums of money without actually being subject to any serious sanction. Therefore, in all such cases, the State should intervene not only proactively but also punitively/suppressively to protect the lessees/leaseholders; with serious sanctions, however, and not amounts of fines that act as an incentive to breach rather than a disincentive.