A true sale is the outright, irrevocable nonrecourse sale of assets to a third party, whereby the assets and all their rights are irrevocably (absolutely) transferred from the seller to the buyer and legally separated from those of the originator. If, instead, ownership remains with the lessor and only a security interest or collateral is assigned, the transaction will be deemed a collateral assignment and rental payments will be characterized for tax purposes as interest and principal payments.
| True Sale of Leases to a Master Trust |
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The transfer of the contractual rights and obligations of a lease from a lessor to another party in a true sale is a novation, whereby the amount novated is transferred from the seller’s to the buyer’s balance sheet. In a novation, the original contract is extinguished and is replaced by a new one in which the buyer takes up rights and obligations which duplicate those of one of the original parties to the contract and enters into a direct relationship with the parties to the lease agreement. Novation does not cancel past rights and obligations under the original contract and is suitable for the transfer of leases where both the burden of contract as well as the benefits under the leases are to be transferred. Novation generally requires lessee action and consent.
Assignment = Transfer of Only Contractual Rights
Novation = Transfer of Contractual Rights and Obligations