When Your Lease isn’t a “Lease”: Beware, the National Credit Act’s Protections Don’t Always Apply

 “In effect, [the High Court] held that the particular lease was not a lease. This may sound like a fragment of Alice in Wonderland. If that is so, it is because the [National Credit] Act itself could have been written by Lewis Carroll so peculiar are some of its provisions” (extract from Supreme Court of Appeal judgment below)

If you are about to enter into a rental or lease agreement for a moveable asset, such as a printer, be sure you know how the National Credit Agreement Act (NCA) treats such agreements. The trap here is that a lease isn’t always a “lease” for the purposes of the Act. 

The implications

The NCA aims to promote fair and responsible lending practices to consumers when they enter into credit agreements. It covers most leases, mortgages, instalment sales, credit cards, suretyships and other similar methods of borrowing, and provides strong protections for credit consumers.

When you enter into an agreement which is covered by the NCA, you can generally feel confident that you won’t have a loan shark to deal with.

However, if the agreement is not covered by the NCA, then these protections fall away. 

For example…

An experienced and financially astute business owner tells of his disastrous experience when entering into a rental agreement for a photocopier. The charges seemed reasonable but the agreement was complex, in very small print and difficult to understand. He was, he says, persuaded by the salesman to sign the agreement which he did without reading and understanding its terms. After several months, the business decided to terminate the agreement. The owner discovered he had entered unknowingly into 2 agreements and the finance house wanted R15,000 on a machine which cost R7,500 new. This after the finance company had already got the photocopier back!

When the owner sought the protection of the NCA, he got a shock. The finance house was indifferent to his arguments about the NCA. He then learnt of a 2013  Supreme Court of Appeal judgment to the effect that per the definition of “lease” in the NCA, only agreements in which ownership passes at the end of the agreement are covered by the NCA. Although the businessman believed that ownership of the photocopier would somehow pass to his business eventually, the terms of the agreements specifically provided to the contrary – he therefore had no NCA protection and was liable for the R15,000.  He might perhaps have had better luck trying for protection under the Consumer Protection Act, which does apply to agreements of this nature, but it wouldn’t have been easy.

If you enter into a credit agreement and it is hard to follow, take a step back and ask questions. If you still have doubts speak to your accountant. Don’t lose out like this business owner did!

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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