With a vivid example specify how the concept of substance over form harmonize the ownership and possession in a lease agreement?

In a lease agreement, the concept of substance over form emphasizes that the true nature of the transaction should be considered, rather than just the legal form of the agreement. This means that the actual rights and obligations of the parties involved should be the focus, rather than just the wording of the contract.

For example, let's consider a lease agreement for a commercial property. The agreement may state that the landlord retains ownership of the property, while the tenant has possession and use of the space for a specified period of time in exchange for rent payments. However, if the tenant makes significant improvements to the property, invests in renovations, and essentially treats the space as their own, the substance of the arrangement may suggest that the tenant has a greater level of ownership and control over the property than the legal form of the lease agreement implies.

In this case, the concept of substance over form would harmonize ownership and possession by recognizing that the tenant's actions and investments have effectively given them a sense of ownership and control over the property, even if the legal title remains with the landlord. This could impact how disputes are resolved, how responsibilities are allocated, and how the relationship between the parties is managed throughout the lease term. By focusing on the substance of the arrangement, rather than just the formal language of the contract, the ownership and possession dynamics in the lease agreement can be more accurately reflected and harmonized.

Concept of Substance over Form:

The concept of substance over form prioritizes the actual economic substance of a transaction over its legal structure. In other words, the true nature of a relationship or agreement is determined by its economic reality, rather than its formal appearance.

Example in a Lease Agreement:

Situation:

- A company (Lessee) enters into a lease agreement with a landlord (Lessor) for a building.
- The lease agreement classifies the transaction as an "operating lease" under accounting rules.
- Under an operating lease, the Lessee does not record the leased asset on its balance sheet and does not recognize depreciation.

Economic Reality:

However, upon closer examination, the lease agreement reveals the following:

- The lease term is very long (10 years), with the Lessee having the option to renew for an additional 5 years.
- The rental payments are high and cover all of the Lessor's costs of ownership, including depreciation.
- The Lessee is responsible for all maintenance and repairs to the building.

Substance over Form Application:

Based on the economic substance of the transaction, despite the formal classification as an operating lease:

- The Lessee has acquired a long-term asset that it benefits from and controls.
- The Lessor has effectively transferred ownership of the building to the Lessee.

Harmonization of Ownership and Possession:

By applying the substance over form concept, the true nature of the lease is revealed:

- The Lessee is the economic owner of the building, as it bears the risks and rewards associated with it.
- The Lessor retains legal title, but its possession of the building is merely temporary.

Conclusion:

The substance over form concept harmonizes the concepts of ownership and possession in a lease agreement by recognizing that the economic substance of the transaction determines the true relationship between the parties. In this case, through careful analysis, it is clear that the Lessee has acquired the economic ownership of the building, despite the formal classification as an operating lease.