The Supreme Court, with its Judgment no.5583 of 2011, has come back to the age-old question of whether sale and lease back agreements are lawful.
In this regard, it is important to remember that so-called sale and lease back agreements can be defined as transactions in which a vendor sells an asset to a financial entrepreneur who pays consideration therefor – becoming the owner – and simultaneously leases back such asset to the vendor, who then pays rent therefor for a certain length of time, with the right to regain ownership of the goods upon expiry of the contract by paying a redemption fee.
The question of law addressed by the Italian Supreme Court with the aforementioned judgment concerns the compatibility of such type of contract with the provision set forth in article 2744 of the Italian Civil Code which considers null and void any covenant that provides for the transfer of ownership of a mortgaged or pledged asset in the event that a debt is not paid by the debtor within the prescribed term.
This is the so-called prohibition of forfeiture agreements, which aims to: a) Avoid the debtor giving the creditor an asset whose value is greater than that of the credit itself; b) Avoid the debtor being forced to sell the asset and accept unreasonable conditions; c) Ensure the principle of equal treatment of creditors is not breached.
In particular, Italian case law has focused on the psychological coercion of the debtor (cfr. on this point the position adopted by Italian Supreme Court Judgment No. 893 of 1999 which states that forfeiture agreements, which are prohibited by article 2744 of the Italian Civil Code, are only configurable when the debtor is forced to transfer an asset and not where the ownership of an asset is transferred by the debtor of his own free will).
It must also be pointed out that the Court has interpreted broadly the prohibition on forfeiture agreements, disapproving transactions which are theoretically legitimate such as sales with redemption, when it becomes clear that an asset has been assigned by way of security. In Italian Supreme Court Judgment No. 13261 of 2007, for example, it was stated that – in the event that an asset is sold (with the possibility of redeeming it) with the specific purpose of giving such asset to the creditor only in the case of default of the borrower, the contract avoids the prohibition on forfeiture agreements provided for under article 2744 of the Italian Civil Code and is null and void.
An even more radical position was taken by the Italian Supreme Court Judgment no.20956 of 2011, which held to be null and void sales with redemption in those situations in which the payment of money by the purchaser does not constitute payment of a price, but execution of a mortgage, and the transfer of the property only serves as a guarantee to be enforced in the event that the debtor does not perform the obligation by paying back the amounts owed.
Therefore, having outlined the main features of the institution in question, we must analyze whether and to what extent the conclusion of a contract of a sale and leaseback agreement may be considered unlawful.
The transaction must be declared void, pursuant to article 1344 of the Italian Civil Code every time that a debtor, in order to ensure the fulfillment of the obligation to the creditor, transfers, by way of guarantee of the debt, an asset, repurchasing such asset after having performed the obligation without providing, in case of default, for the recovery of any excess value (when compared with the amount owed to the purchaser) of the asset in question.
The Court has also indicated the following (cumulative) criteria in order to assess the unlawfulness of a sale and lease back agreement: a) The fact that the vendor owes money to the purchaser; b) The fact that the former finds himself in a financially difficult situation; c) The fact that there is a disparity between the value of the property transferred by the vendor and the consideration paid by the purchaser.
In particular, it has been proposed that, in order to preserve the validity of the sale and lease back agreement in question, such sale should also be accompanied by an estimate of the real value of the asset, with the debtor being entitled to the restitution of the value of the asset which is in excess of the unpaid debt.
In conclusion, therefore, a literal interpretation of the aforementioned Italian Supreme Court ruling can lead us to conclude that sale and leaseback agreements may be valid provided that additional measures are taken so as to eliminate the risks associated with forfeiture agreements.