On May 19, 1995 the Netherlands Supreme Court rendered a decision (the "Sogelease Decision") which took away most of the uncertainty surrounding the validity of sale and leaseback transactions involving assets located in The Netherlands (including aircraft registered as to nationality in The Netherlands).

The uncertainty stemmed from Section 3:84(3) of the Netherlands Civil Code ("NCC") which invalidates transfers of title for purposes of security or lacking the purpose of bringing the property into the estate of the transferee.

This clause was enacted to enforce the closed system of security rights under Netherlands law which provides exclusively for rights in rem, i.e. the right of pledge (pandrecht) in respect of moveable assets and intangible property and the mortgage (hypotheek) in respect of "registered" property (i.e. real estate, sea-going vessels and aircraft registered in the title record).

Authoritative legal scholars had argued that finance sale and leaseback transactions were invalid pursuant to Section 3:84(3) NCC because the economic risk as to the leased property was retained by the lessee/seller upon transfer of title.

The Sogelease Decision
The relevant transaction concerned the sale and financial leaseback of printing presses. When the lessee became insolvent, the receiver argued, on the basis of Section 3:84(3) NCC, that the transfer of title to the equipment by the lessee to the lessor was invalid. The Netherlands Supreme Court rules against the receiver. It was held that the purpose of Section 3:84(3) is only to prohibit transfer of title if such transfer is meant to grant the transferee a preferred security right on the equipment in relation to other creditors of the transferor.

The main element of such preferred position is, according to the Supreme Court, the right to foreclose on the asset without regard to the rights of other creditors.

Therefore, an agreement which would, in a default scenario, limit the remedies of the transferee, i.e. the lessor, to selling the asset for the purpose of applying the proceeds of such sale towards the debt of the transferor, i.e. the lessee, and would obligate the lessor to pay any excess proceeds to the lessee will invalidate the transfer of title.

However, if the remedies of the transferee/lessor are not restricted in this way, it will be clear that a true sale was intended and not just a transaction to protect the transferee's position as a creditor of the transferor. The Sogelease Decision expressly held that the findings relate to new as well as to used equipment.

It follows from the Sogelease Decision that the lessor, after early termination, should be free to decide what to do with the equipment after repossession. The lessor should be free to sell, re-lease or otherwise dispose of the equipment.

There should be no expressed or implied obligation for the lessor to sell the equipment and transfer to the lessee any excess proceeds. A few questions remain, however.

It is still not clear what the position is if:
- the lessor is not under the obligation to sell the equipment, but that he must transfer (part of) the excess sale proceeds if he decides to sell;
- the lessor, if he re-leases or otherwise disposes of the equipment, is to transfer the NPV benefit of such re-lease, to the extent it exceeds the termination payment, to the lessor.

Any arrangement which would grant the upward potential to the lessee may, therefore, still contain a certain element of risk under Section 3:84(3) NCC.

Berend Crans, De Brauw Blackstone Westbroek, Amsterdam

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