Judge sides with lessor
over profit cap claim.
Golden Sunsets Navigation
(UK) Ltd vs Lloyds Portfolio Leasing Ltd
Watson, Farley & Williams
LLP acted for Lloyds Portfolio Leasing Ltd in relation to a claim
by a lessee, under a finance lease of a ship, to be paid the
additional tax benefit which accrued to the lessor on the
termination of the lease. Michael L’Estrange, a tax partner at WFW,
explains the background to the case and tells us what we can learn
For WFW this started as a
simple termination of a finance lease of a ship. The 15-year term
of the lease was about to end and the parties had agreed that the
final rental would be paid, the ship sold and the lease come to a
natural end by effluxion of time.
Everything seemed to be going
smoothly until it became apparent that the ship was to be sold for
greater than original cost which meant that there was an additional
benefit available to the lessor.
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As a result of the sale,
there was a full balancing charge but this was offset by part of
the usual rebate of rental.
However, the capital gain
arising on the sales proceeds in excess of original cost was offset
by indexation so the remainder of the rebate of rental gave rise to
an additional benefit to the lessor. No-one disputed this benefit
existed – the dispute was about who was entitled to it?
The lessee claimed
entitlement to the benefit under the terms of the documentation –
either an express term in the Financial Schedule or because the
effect of the lease was that the lessor undertook not to make any
profit or return under the lease greater than the after tax profit
take-out (ATPTO). In other words, there was a profit
The lessor’s argument, on the
other hand, was simply that the lease and financial schedule did
not preclude it from making additional profits over the assumed
Also, as owner of the ship it
was not only liable to tax but also to retain any tax benefits
arising out of the transaction save to the extent that the lease
and financial schedule expressly provided otherwise.
After a detailed analysis of
the lease terms the judge agreed with the lessor. The whole case
revolved round contract construction – the central plank to Lloyds’
argument. The fact it was a finance lease (or any other sort of
lease) did not have the effect of allocating risk and reward
between the parties.
In the judge’s view each
party to a transaction bears the tax consequences of its receipts
and payments with regard then had to the contract in question to
determine how such matters are dealt with.
In this case it was held (as
probably reflects most deals) that the provisions relating to sale
of the vessel, receipt of proceeds, balancing allowances and
rebates of rental, including capital gains, were one way protection
for the lessor. Any additional benefit would be for the Lessor
unless it had agreed to pass it to the Lessee.
What does this mean for us?
First, what the contract says is of prime importance.
It is easy to think that
everything is covered by cash flows but it is the contract that
determines the way risks and rewards are split. Secondly, as a
lessor you want to be protected from the unexpected. As a lessee
you want to be given a share of any benefits. There will be
conflict there – sort it out at the beginning.
James Watters is a
partner at Watson, Farley & Williams