I. About This Article
A finance lease agreement is an important financial and contractual instrument for businesses. It is often used when a company needs a vehicle, equipment, machinery or another asset for its operations, but cannot purchase it immediately.
In practice, finance leasing is especially common in financing vehicles, production equipment, construction machinery and other business assets. However, its legal nature is specific and differs significantly from both lease/rental agreements and sale and purchase agreements.
The case law of the Supreme Court of Georgia emphasizes that finance leasing is a financial instrument and a flexible mechanism for allocating risks between the parties. The lessee uses an asset that it does not own, while the lessor retains ownership and, in certain cases, may be entitled to recover the leased asset.
This article will help you understand what a finance lease agreement means, what obligations the lessee has, when the agreement may be terminated, what happens after the leased asset is returned, how the risk of damage is allocated and what practical lessons follow from recent Supreme Court practice.
The article is based on the Civil Code of Georgia, the UNIDROIT Ottawa Convention on International Financial Leasing, the UNIDROIT Model Law on Leasing, case law of the Supreme Court of Georgia and TB Legal’s experience in contract law.
II. What Is a Finance Lease Agreement?
Under Article 576 of the Civil Code of Georgia, by a finance lease agreement, the lessor undertakes to transfer specific property to the lessee for use for the period agreed in the contract, with or without the right to purchase the property, while the lessee undertakes to pay remuneration periodically.
The specific feature of finance leasing is that the lessee determines the asset and chooses the supplier, while the lessor acquires the asset for the purpose of leasing it, and this fact is known to the supplier.
In other words, a finance lease transaction usually involves three main parties: the lessor, the lessee and the supplier. The lessee chooses the asset needed for business activity; the lessor finances the acquisition of that asset; and the supplier transfers the asset under the relevant conditions.
For this reason, finance leasing is not an ordinary rental relationship. It is a more complex financial and contractual structure where ownership, the right of use, payment obligations and risk allocation are closely connected.
III. How Does Finance Leasing Differ from Lease/Rental and Sale?
Finance leasing is often confused with rental or sale and purchase, but these legal relationships are substantially different.
In a rental relationship, a party receives property for temporary use and pays rent. In a sale and purchase agreement, the buyer acquires ownership of property in exchange for payment of the price. In a finance lease agreement, however, the lessee uses property that does not belong to it, although the agreement may provide an option to purchase the asset later.
In the practice of the Supreme Court of Georgia, a finance lease agreement is treated as a special type of contract derived from lease/rental law, but different from it. The Court also indicates that, under the concept of finance leasing, ownership of the asset is not necessary in order to generate economic benefit. The main purpose of finance leasing is the realization of the right to use the leased asset.
Therefore, for a lessee, the key issue is not only whether ownership will eventually transfer. It is equally important to understand under what conditions the asset is used, what payment obligations apply, how the agreement may be terminated and what legal consequences follow after the asset is returned.
For more information about sale and purchase agreements, see our blog: Sale and Purchase Agreement – What Businesses Should Know About Defective Goods, Payment of Price and Withdrawal from Contract.
For more information about lease and rental relations, see our blog: Lease Agreement – What Businesses Should Know About Rent, Termination and Court Practice.
IV. The Leased Asset and Selection of the Supplier
One of the important features of finance leasing is that the lessee determines the asset and chooses the supplier. This may be a vehicle, production equipment, machinery or another asset needed for business activity.
At the same time, the lessor acquires the asset specifically for the purpose of providing it under a finance lease agreement. The supplier is aware that the asset will ultimately be transferred for use by the lessee.
For this reason, issues related to the quality and suitability of the leased asset require special attention. In one Supreme Court case, the Court noted that by signing both the valuation document and the agreement, the lessee confirmed that the vehicle was in proper condition and accepted the vehicle. In such circumstances, the later argument that the vehicle had been received in damaged condition was considered unfounded.
Therefore, it is especially important for the lessee to carefully check the acceptance certificate, valuation document, technical condition and all statements confirmed by signature when receiving the leased asset. In practice, these documents may have decisive importance in a later dispute.
V. The Lessee’s Payment Obligation
The central obligation under a finance lease agreement is the lessee’s obligation to pay the lease remuneration.
The Supreme Court of Georgia has repeatedly explained that after the finance lease agreement is concluded and the leased asset is received, the lessee has an unconditional and irrevocable obligation to pay the lease remuneration.
According to the Court, this obligation arises because the lessee uses property that it does not own. The lessor, as owner, must be protected against unlawful interference and depreciation of the property.
The lessee pays lease remuneration proportionally to the use and depreciation of the asset. Accordingly, when the lessee fails to pay the lease remuneration, the lessor has a basis to demand return of the leased asset.
This approach is practically important for businesses: use of a leased asset does not mean acquisition of ownership. If the lessee breaches the payment schedule, it may lose the right to use the asset and may not have a right to demand restoration of possession.
VI. The Leased Asset as the Main Security
An important explanation in the practice of the Supreme Court is that the essence of a finance lease relationship is that the leased asset itself serves as the main security of the contractual relationship.
This means that if the lessee breaches the payment schedule, the leased asset is returned to the lessor and remains in the lessor’s ownership or possession. In such a case, as a rule, the lessee does not have the right to demand restoration of possession over the leased asset.
The Court emphasizes that payments made by the lessee represent remuneration for the service already received. If the lessee used the leased asset for a certain period, the amount paid during that period cannot automatically be treated as the lessee’s damage merely because the agreement was later terminated and the asset was returned to the lessor.
Therefore, before entering into a finance lease agreement, businesses should consider that the risk of losing the leased asset is real if payment obligations are not performed. Breach of the agreement may result not only in accumulation of debt, but also in loss of the right to use the asset.
VII. Termination of a Finance Lease Agreement
Under Article 5805 of the Civil Code of Georgia, the lessor may terminate a finance lease agreement if the lessee materially breaches its obligations.
Systematic breach of the payment schedule may generally be considered a material breach. In such a case, the lessor may become entitled to terminate the agreement and demand return of the leased asset.
However, court practice also shows that termination of the agreement has both substantive and formal preconditions. The substantive precondition is breach of obligation. The formal precondition may be granting an additional period, giving a warning or complying with the notification procedure agreed in the contract.
In one Supreme Court case, it was established that the lessor had breached the procedural rule for withdrawal from the agreement because it failed to comply with the relevant warning requirement. This did not necessarily mean that possession had to be restored to the lessee, but it created a basis for assessing the lessor’s liability.
For more information about termination of contracts, see our blog: Termination of a Long-Term Contract – What You Should Know About Article 399 of the Civil Code of Georgia.
VIII. Return and Realization of the Leased Asset
After termination of the agreement, the lessor generally has the right to recover the leased asset and dispose of it.
However, this right does not mean that the lessor may act arbitrarily or without control. If the agreement requires the lessor to inform the lessee about the sale or re-leasing of the asset, the lessor must comply with that obligation.
In one Supreme Court case, the Court examined a clause under which the lessee had to be informed of the price at which the leased asset would be sold or re-leased, so that the lessee could have an opportunity to find a buyer offering a higher price.
The Court explained that such a clause serves to protect the lessee. Its purpose is to give the lessee an opportunity to reduce or fully cover the debt by ensuring that the leased asset is sold at a better price.
Therefore, for the lessor, it is important to comply with the realization procedure defined by the agreement. For the lessee, it is important to monitor this procedure and, where necessary, take legal action.
IX. Valuation of the Leased Asset and Burden of Proof
In finance lease disputes, the valuation of the leased asset and the price at which it was sold are often disputed.
The practice of the Supreme Court shows that the party claiming that the leased asset was valued or sold at a significantly lower price must present proper evidence.
In one case, the lessor submitted an asset valuation report where the returned equipment was valued, among other things, as scrap. The defendant submitted an independent valuation, but the Court did not accept it because the report did not reflect the market value of the leased assets at the time of their return or sale.
Based on the Court’s approach, merely submitting an alternative valuation is not enough. The valuation must relate to the relevant time, the relevant asset, its actual condition and real market conditions.
Therefore, if the lessee disputes the valuation or sale price of the leased asset, it should prepare high-quality evidence: a valuation report, technical condition documents, comparative market data and circumstances showing that the lessor acted in bad faith or sold the asset at a significantly undervalued price.
X. Insurance Compensation and Reduction of Debt
In finance lease disputes, another issue may arise: whether the lessee’s debt should be reduced by insurance compensation.
In one Supreme Court case, the lessor received GEL 16,000 as a result of an insured event. The dispute concerned whether this amount had been taken into account when calculating the lessee’s remaining debt.
The Court focused on the fact that the lessor could not clearly indicate and prove how the GEL 16,000 received had been deducted from the debt amount. In this context, the Court noted that parties themselves must indicate the facts on which their claims are based.
This practice is an important lesson for both lessors and lessees. If insurance compensation is received in relation to the leased asset, its impact on the debt must be clearly reflected and documented.
XI. Damage Caused by the Leased Asset and Liability
A leased asset may be a vehicle or another type of property whose use creates a risk of causing damage to third parties.
The Supreme Court has explained that transfer of possession under a finance lease agreement is a legally significant act that releases the owner of a source of increased danger from tort liability.
For example, if a vehicle is transferred under a finance lease agreement into the actual possession of the lessee, the lessee may be considered the responsible person for compensation of damage, even if the vehicle is formally registered in the name of the lessor.
This principle is especially important in vehicle finance leasing. The lessee should understand that receiving possession means not only using the asset, but also assuming legal risks connected with its use.
XII. When May an Agreement Related to Finance Leasing Be Considered Void?
In one Supreme Court case, significant attention was paid to when an agreement related to finance leasing may be considered immoral or void.
In that case, the leased asset was not transferred to the lessee, but the lessee was still required to pay a monetary obligation under an arrangement from which it had received no real benefit. The Court considered that such an agreement contradicted the legal nature of finance leasing and treated it as an immoral transaction.
This practice shows that the formal wording of a finance lease agreement is not always sufficient. The Court assesses the substance of the transaction, the real position of the parties and whether the agreement corresponds to the essence of finance leasing, good faith and the principle of fairness.
For more information about unlawful and void transactions, see our blog: Unlawful Transaction – When Can a Contract Be Declared Void?
XIII. What Should a Business Consider Before Signing a Finance Lease Agreement?
Before entering into a finance lease agreement, a business should carefully assess several issues.
First, the leased asset, its technical condition, suitability and the information reflected in the acceptance certificate should be checked. Circumstances confirmed by signature may be difficult to dispute later.
Second, the payment schedule, penalties, default interest, interest, consequences of delay and termination conditions should be assessed.
Third, it should be determined what happens after the asset is returned: how the asset is valued, how it is sold, whether the lessee is informed of the sale price and whether the lessee has an opportunity to find a better buyer.
Fourth, the impact of insurance compensation on the debt should be defined. If insurance compensation is received in relation to the asset, the agreement or later calculation should clearly show how it reduces the debt.
Fifth, liability for damage should be assessed, especially where the leased asset is a vehicle or another source of increased danger.
For more information about contractual risk management, see our service page: Contract Law Services in Georgia.
XIV. How TB Legal Can Help
TB Legal assists businesses with drafting, reviewing and assessing risks related to finance lease agreements, as well as developing legal positions in finance lease disputes.
Our services include analysis of contract terms, assessment of payment schedules and liability mechanisms, review of conditions related to return and realization of the leased asset, legal assessment of penalties and debt calculations, as well as negotiation support with the lessor or lessee.
If you are planning to enter into a finance lease agreement, already have a dispute with a lessor or need legal assessment of existing lease obligations, it is important to obtain legal advice before signing the agreement or before the dispute becomes more complex.
XV. Conclusion
A finance lease agreement is a flexible financial instrument for businesses, but its legal nature is highly specific.
Supreme Court practice shows that after receiving the leased asset, the lessee has a strong and practically unconditional obligation to pay the lease remuneration. In case of payment default, the lessor may demand return of the asset, and the lessee generally does not have a right to demand restoration of possession.
At the same time, the lessor must also comply with the rules on termination, sale, valuation and debt calculation. The principle of good faith applies to both parties in a finance lease relationship.
For this reason, before entering into a finance lease agreement, it is necessary to legally analyse its terms, assess possible risks and create a documentary structure that reduces the risk of future disputes.
Contact TB Legal if you need drafting, review or legal assessment of a finance lease agreement or a finance lease dispute. We will help protect your business interests.
XVI. Sources Used
This article is based on the following sources:
- Civil Code of Georgia.
- Supreme Court of Georgia, case No. AS-1337-2025, 5 March 2026.
- Supreme Court of Georgia, case No. AS-886-2025, 24 December 2025.
- Supreme Court of Georgia, case No. AS-1846-2018, 5 May 2022.
- Supreme Court of Georgia, case No. AS-462-2021, 8 June 2022.
- Supreme Court of Georgia, case No. AS-96-2021, 21 June 2022.
- Supreme Court of Georgia, case No. AS-804-2022, 12 April 2024.
- Supreme Court of Georgia, case No. AS-1414-2024, 24 January 2025.
- Supreme Court of Georgia, case No. AS-392-2025, 23 December 2025.
- UNIDROIT Convention on International Financial Leasing, Ottawa, 1988.
- UNIDROIT Model Law on Leasing, Rome, 2008.
- TB Legal’s practical experience in contract and business law.
Disclaimer
This article has been prepared for general informational purposes only and does not constitute individual legal advice or a legal opinion. Issues related to finance lease agreements may be assessed differently depending on the specific contract terms, condition of the leased asset, payment schedule, grounds for termination, rules for return and realization of the asset, available evidence and factual circumstances of the case.
Before making a decision in a specific matter, it is recommended to obtain individual legal advice from a qualified lawyer.
