Often, at first, minor financial problems cause many consequences. Existing budgets fall apart like dominoes because of them. If you have a leased car, this often manifests itself, among other things, in the termination of the lease agreement by the lessor, i.e. the leasing company. After the vehicle has been vindicated, the lessor usually sells the leased item to another party, unfortunately, often at a price significantly below market value. How disadvantageous is this for the lessee and, above all, how to combat it? Based on our practice in defending such aggrieved customers, we suggest in this article how to fight it. That is to say, a comprehensive guide to what to do in the case concerning the sale of a car by a leasing company at an undervalue. A brief introduction - what leasing is and what can be leased
There are several types of leasing, the most common being operating leasing. Under such an agreement, the financier (lessor) undertakes to acquire an item from a designated seller under the terms specified in the agreement and to grant its use, or use and enjoyment, to the user (lessee) for a defined period. The user, in turn, undertakes to pay the financier monetary remuneration in agreed instalments, equal to at least the price or remuneration paid by the financier for the acquisition of the item. The subject of leasing is not solely mechanical vehicles – it can also include production lines or specialised equipment (construction equipment, ultrasound machines, night vision devices, lasers used in cosmetology, etc.). In reality, the user most often decides to "lease" a car – often a relatively new one, the value of which is quite high, depending on the make and model of the vehicle.
Vehicle recovery and sale
The act regulating the leasing contract includes, among others: Civil Code. It provides for regulations not only protecting the lessor, but also the user of the leased item, taking into account, first of all, the often dominant position of the financing party under this agreement. One of the rights of the financing party is the possibility of terminating the leasing contract with immediate effect. Pursuant to Art. 70913 Civil Code, if the beneficiary delays payment at least one installmentThe lessor should give the lessee a reasonable period of grace in writing to pay the arrears and threaten to terminate the lease agreement with immediate effect if the time limit expires without effect, unless the parties have agreed on a period of notice. In the event of such termination, the lessor will most often immediately proceed to repossess the vehicle he owns and then lease it back to another person or, even more often, simply sell it. Not always at what would be considered a market price.
What impact does the sale of the leased item after early termination of the contract have on the rights of the original, vindicated lessee?
Well, according to Art. 70915 Civil Code, in the event of termination of the leasing contract by the financing party as a result of circumstances for which the lessee is responsible (most often due to: delay in payment of leasing installments), the financing party may demand that the lessee immediately pay all unpaid installments provided for in the contract, less the benefits that the financing party obtained as a result of their payment before the agreed date and due to termination of the leasing contractThe highlighted fragment is important – if the funder obtains benefits as a result of the termination of the lease agreement, the lessee will be able to effectively demand a reduction in the amount of outstanding lease payments by that sum. Unfortunately, leasing companies often act improperly – they sell the vehicle at a reduced price – so that the lessee does not "find" any benefit.
Sale of a recovered vehicle at a lower price – what do the courts say about it?
It's certainly one of the more interesting and current topics, as the use of car leases and more is very popular nowadays. Therefore, we have reviewed court rulings in which this issue has been raised. A frequently discussed matter is obligation to behave due diligence by the lessor. What does this statement mean? Due diligence within the meaning of the Civil Code is: the care generally required in a given type of relationshipThis term refers to diligence, conscientiousness, accuracy, taking into account the professional nature of the activity – therefore, the lessor must act as if they themselves wanted another entity to act on their behalf – i.e., with the aim of achieving the best economic result.
If a vehicle is sold at its market price on the date of disposal, or even more, it will certainly be deemed to have been handled with due diligence. Selling a vehicle at a lower price – and as case law shows, sometimes below half its value – does not lead to the same conclusions. In one of the rulings[1] The lessor financed equipment used in aesthetic medicine, which was subsequently repossessed and sold due to the lessee's default on instalment payments. A significant issue in this matter was that the General Terms and Conditions agreed that "in the event, inter alia, of the sale of the leased item by the plaintiff [the financier], the total leasing receivables shall be reduced by the sale price of the leased item excluding VAT". Therefore, the issue of selling the leased equipment at the highest possible price was important for the lessee as it would result in a reduction of the debt amount. On the date of repossession of the equipment, their values were approximately as follows: PLN 89,500, PLN 23,700, PLN 36,400.00, PLN 72,600, and PLN 48,500.
Following the auction of all items, the following net sale prices were ultimately achieved: PLN 2,900, PLN 5,000, PLN 8,600, PLN 34,500 and PLN 21,000. Consequently, each item was sold for less than 50% of its value on the date of the equipment’s return (recovery) (and even close to 3% of its value!), which had an adverse effect on the borrower, as only a negligible amount was deducted from the outstanding debt. In order for the court to resolve this issue, evidence in the form of an expert’s report was presented, in which the expert stated that: (1) the financier sold all the equipment for a price lower than market value under conditions of forced sale; (2) the net sum of 2,900 PLN obtained for a piece of equipment worth just under 90,000 PLN is particularly egregious. Consequently, the court found that the auction conducted by the claimant was not carried out with due care. “The documents submitted to the case files clearly showed that the starting amount of the auctioned items was reduced every two or four days until they were sold significantly below their value. According to the District Court, a rather common procedure is to keep the starting amount of the auctioned item at a stable level for a longer period of time, and not to reduce it two days after the item is put up for auction (...). Moreover, according to the Court of First Instance, the plaintiff's financial situation did not force him to sell the equipment as soon as possible, regardless of the amount obtained.
The plaintiff, while exercising due diligence in conducting the auction and being aware of the value of the medical devices being sold, could certainly have achieved higher amounts.”
As a result of the appeal lodged, the Court of Second Instance found, based on another expert opinion, that "(...) in the case of a forced sale, a time factor arises, which is too short to properly expose the item on the market; therefore, in order to sell it in a shorter time, the price must be more attractive. (...) The expert additionally pointed out that the market for the sale of ex-lease items is characteristic, as bargains are sought on this market." Nevertheless, the expert also noted that the sales price of the devices was understated, which was the reason gross negligence on the part of the plaintiff (i.e. the financier), and, as regards the items covered by the opinion, there were no grounds for setting a price reduction level other than 50%. Consequently, the courts at both instances correctly held that the exercise of due diligence in the contractual relationship with the lessee obliges the lessor to take steps to dispose of the recovered items at a price corresponding to their actual value. This case is one of the first rulings (albeit not entirely favourable) in which the problem of grossly negligent practices by companies specialising in leasing agreements has been highlighted.
Gross negligence of the lessor as an argument for underselling the vehicle
The Supreme Court considered another leasing case[2], where its recognition resulted in the complete annulment of the appealed judgment and the case was remitted for reconsideration by the Court of Appeal. The original judgment upheld the payment order, obliging the defendants (users) to pay over 50,000 PLN to the lessor. The subject of the lease in this case was a MAN TGA semi-trailer tractor (colloquially, a truck). Due to the fruitless expiry of the deadline for payment of outstanding periodic instalments, the lessor terminated the lease agreement with immediate effect and called upon the users to return the leased item. The vehicle was only returned after the financier took recovery action with the help of a debt collection agency. It was established that the market value of the truck on the day of recovery was PLN 165,400 gross, while on the day of sale – PLN 84,400. However, for what amount did the lessor sell the vehicle? For a grossly low amount. PLN 32,300 gross. The Court of Appeal originally held that, in accordance with the aforementioned Article 70915 The Civil Code determines the benefits of the financing party in the event of sale of the leased item after termination of the contract the price obtained from its sale, not its valueHowever, the court had to assess whether there was a failure to perform or improper performance of the obligation provided for the lessee's benefit, i.e., deducting from the requested amount the benefits that the financier obtained as a result of the termination of the lease agreement and the sale of the vehicle. The lessor did not present any evidence that would allow it to be concluded that, with due diligence, a higher price, corresponding to the market value of the item, could not have been obtained. This circumstance was all the more significant because, in the case of the agreement under examination, a provision similar to the one in the first case was also included, obliging the lessor to reduce the compensation amount (claimed from the lessee) by the net sale price of the leased item.
Taking all the circumstances into account, the Court of Appeal found, that the sale of a tractor-trailer for less than half of its value was a breach of the obligation, due diligence, as well as a violation of Art. 70915 Civil CodeAs a result of the appeal lodged by the beneficiaries, the Supreme Court, as previously mentioned, quashed the judgment in its entirety and ordered the case to be retried by the Court of Appeal. In accordance with the legal reasoning of the judgment, the liability of the beneficiary of Article 70915 Civil Code (i.e. the obligation to pay the remaining leasing installments minus the factors enumerated there) is a liability compensation. Because compensation in this case may not exceed the damage to the injured party's property, the compensation due to the financing party is reduced by the benefits obtained by him - one of them is the amount obtained from the sale of the leased item (selling price, rather than the value of the vehicle): “The benefits derived must be linked to the income actually generated from the asset, rather than merely the income that might potentially be derived from it; and thus, above all, to the sale price obtained by the lessor (seller) (…). During the period between the return of the asset to the lessor and its sale, the asset may depreciate in value, which affects the price that can be obtained for it. Occasionally, depending on the current market situation regarding the leased asset, it may prove necessary to sell it below market price so that any delay in its sale does not cause a further decline in its value and, consequently, in the price that can be obtained for it. (…)
This does not mean, however, that it is irrelevant how long after the return of the item, the financing party concluded a contract for the sale of the item that was previously the subject of leasing."If the subject of a lease agreement is an item (as is the case with motor vehicles) whose value is significantly dependent on its age, it should be assessed whether the financier took, with the diligence required of them, action to sell it with the smallest possible difference in relation to its market value at the time of its return. (...) In light of the established findings, it appears that the tractor unit, two years after its return to the plaintiff, had a significantly lower value than at the time of its return, and consequently, the conclusion is justified that its faster sale could have led to obtaining a higher price than the value finally adopted by the second-instance court for the settlement."
In the event of inappropriate diligence of the financing party in taking actions aimed at selling the thing that is the subject of leasing for settlement - as part of the benefits referred to in Art. 70915 kc – it is not the objective (market) value of the item at the time of its return that is taken into account, but the most likely price at which the financing party could have sold the item if he had taken steps to sell it with due diligence.The final sentence of this ruling is important – in the case of such gross negligence on the part of the lessor, the amount actually obtained should not be subject to deduction, but rather the price at which he could sell the item if he took steps to sell it with due diligence. This position of the Supreme Court, which has not been repeated too many times yet, but is obvious in the light of the current market crisis, gives some hope to lessors who are in trouble. It also indicates the possibility of pursuing claims against leasing companies and defending against their claims.
Sale of leased item at an "abnormal" price – i.e. the first sale of the vehicle to a connected company
Unfortunately, a very common phenomenon is that leasing companies circumvent the law. The provisions of the Civil Code almost directly indicate that the benefits obtained within the meaning of Art. 70915 they only apply to the first sale of the vehicle - i.e. the one where the seller is the lessor. This provision, or any other, does not address the problem of the financing party selling a given vehicle to a company de facto through it (a subsidiary company) entirely controlled by him, and only then sells it at a "normal", higher price to a further customer. It is only at this stage that the lessor realises real, true benefits, which unfortunately will not be deducted from the compensation claimed from the lessee, as this fact is simply elusive in light of the current regulations. It appears, however, that courts will slowly be persuaded to appropriately apply certain norms of the Code of Civil Procedure, which will enable the detection and stigmatisation of such phenomena. The existence of such a legal loophole speaks excessively to the detriment of leaseholders. It allows leaseholders to sell leased items de facto themselves, treating the entire possibility of reducing the lessee's compensation artificially, enabling them to make a second, legally unlimited commercial transaction from which they can really gain a lot. Therefore, if you get into any dispute with the lessor, it is worth requesting information about who purchased the vehicle.
Our Law Firm assists Clients in pursuing claims against leasing companies, and based on our experience, the issue of debt collection and the sale of motor vehicles at an undervalued price is becoming increasingly common. Unfortunately, many individuals feel cheated by leasing companies, and we strive to combat dishonest leasing firms. We invite you to get in touch. After a full review of the facts of your case, we will prepare an action plan appropriate to the given situation, with the aim of achieving the best possible outcome for your settlement with the leasing company. This includes settlements that took place a year or two ago.
[1] Judgment of the Court of Appeal in Warsaw of July 24, 2019, VII AGa 1204/18, LEX [2] Judgment of the Supreme Court of October 28, 2016, I CSK 649/15, LEX