A closer look at 'purchase and leaseback' transaction

In-Depth Analysis

Continuing from the previous article on purchase and leaseback, the author addresses the question of cost effectiveness and the legal mechanics that make this transaction viable. After the Eid Al Adha break, the conclusion of the purchase and leaseback topic covers the modus operandi of the transaction and the cost effectiveness question vis-a-vis the conventional bank's term loan, given the land registry fee and other relevant charges expected to be incurred by the Islamic bank upon assuming the ownership of the customer's asset. The Shariah scholars' position is clear in such transactions: it is considered adequate if the Islamic bank and customer sign the asset sale and purchase agreement where the Islamic bank is the buyer and the customer is the seller, without requiring the customer to transfer the legal title to the Islamic bank. This is because as per Shariah, the ownership of the asset gets transferred to the buyer based on the signed sale and purchase contract. Until the emergence of the land registry function sometime in the 19th century from the UK, there was no such requirement in the world — the sale and purchase of real estate was being carried out freely. What does title trustee mean? The title trustee is a person or an entity which holds the legal title of an asset for and on behalf of another person or entity, or in simple terms, on behalf of the de facto owner. How does a trustee assume such responsibility? The parties sign a document called 'deed of trust' or 'trust deed' which is an agreement between the principal (the de facto owner) and another person or entity holding the registered title to the property, who assumes the responsibility as the trustee. Such a deed is executed under the trust laws of the relevant jurisdiction. The difference between the two sets of law is that common law is based on precedents whereas civil law is codified statutes. As per careful assessment, about 150 countries follow civil law and almost 80 have preferred to work on a common law basis, and then there are countries which have a mix of both sets of law. The UAE works under a civil law regime whereas Malaysia mainly has a common law-based legal system. Both sets of law undergo updating from time to time in the relevant jurisdiction. The important aspect for readers to appreciate is that the agency agreement is equally accepted in all sets of legal systems. Some Islamic banks have come up with double safety measures whereby they seek a mortgage over the asset as part of the purchase and leaseback transaction. Such a mortgage is released upon the Islamic bank assuming the ownership of the asset in a default situation, or upon the successful completion of the lease agreement. As such, an Islamic bank can provide the required liquidity to a customer in need through a purchase and leaseback transaction without incurring any additional costs to the customer vis-a-vis a conventional bank's term loan.