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UCC Overview: Article 2A: Parts 1 – 5/General Provisions; Formation and Construction of Lease Contract; Effect of Lease Contract; Performance of Lease Contract: Repudiated, Substituted, and Excused; Default . Breakout Session # 517 Presenters: Allen L. Anderson; Attorney; Fees & Burgess, P.C.
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UCC Overview:Article 2A: Parts 1 – 5/General Provisions; Formation and Construction of Lease Contract; Effect of Lease Contract; Performance of Lease Contract: Repudiated, Substituted, and Excused; Default Breakout Session # 517 Presenters: Allen L. Anderson; Attorney; Fees & Burgess, P.C. Jeffrey L. Roth; Attorney; Fees & Burgess, P.C. Date: Tuesday; July 20, 2010 Time: 2:30 p.m. – 3:45 p.m.
Article 2A • Part 1: General Provisions • Part 2: Formation and Construction of Lease Contract • Part 3: Effect of Lease Contract • Part 4: Performance of Lease Contract: Repudiated, Substituted, and Excused • Part 5: Default
Part 1: General Provisions Article 2A
Article 2 is the “statutory analog” of Article 2A • The lease is close in spirit and form to the sale of goods. • Many definitions and themes found in Article 2 are also found in Article 2A – “Merchant,” “Unconscionability,” “Agreement,” “Contract,” “Goods” all flow through.
“Lease” means transfer of the right to possession and use of goods for a term in return for consideration, but a sale, including a sale on approval or a sale or return, or retention or creation of a security interest is not a lease. Unless the context clearly indicates otherwise, the term includes a sublease. [§ 2A–103(1)(j)]
“Consumer lease” means a lease that a Lessor regularly engaged in the business of leasing or selling makes to a Lessee who is an individual and who takes under the lease primarily for personal, family, or household purposes. [§ 2A–103(1)(e)]
Note that some jurisdictions limit the definition of a consumer lease to leases for which payment does not exceed a certain dollar amount. • Example: • Alabama – $100,000 • California – No limit
“Finance Lease” is a three–party transaction involving a Lessor, Lessee, and Supplier. In such leases, the Lessor basically provides only financing and does not select, manufacture, or supply the goods, and the Lessee looks to the Supplier for all issues with respect to the performance of goods leased (e.g., warranties, etc.). [§ 2A–103(1)(g)] • This definition would also normally include “sale and lease back” transactions.
Consumer Leases – Choice of Law • If the law chosen by the parties to a consumer lease is that of a jurisdiction other than the jurisdiction in which the Lessee resides at the time the lease agreement becomes enforceable, or within 30 days thereafter, or in which the goods are to be used, the choice is not enforceable. [§ 2A–106]
Judicial Forum • If the judicial forum chosen by the parties to a consumer lease is a forum that would not otherwise have jurisdiction over the lease, the choice is not enforceable. [§ 2A–106]
Statute of Frauds • Leases with total payments, excluding payments for options over $1,000, must be evidenced by a writing signed by the party against whom enforcement is sought. [§ 2A–201, is the same as § 2–201, except the dollar threshold]
With slight variations to accommodate the difference between a sale and a lease: • Firm offers – lack of consideration OK, cannot exceed three months [§ 2A–205 = § 2–205] • Offer and Acceptance in Formation of a Lease – acceptance by any reasonable medium [§ 2A–206 = § 2–206]
Modification, Rescission, and Waiver – modification to lease needs no consideration to be binding [§ 2A–208 = § 2–209] • Express Warranties – applied even to Lessor in finance lease [§ 2A–210 = § 2–313]
Lessee Under Finance Lease as Beneficiary of Supply Contract • The benefit of Supplier’s promises to the Lessor under the supply contract and all of the warranties, including those of any third party provided in connection with or as part of the supply contract, extends to the Lessee to the extent of the Lessee’s leasehold interest under finance lease, but is subject to the terms of the warranty and the supply contract and all the defenses or claims arising therefrom. [§ 2A–209]
Warranties Against Interference and Infringement • Lessor warrants that for the lease term no one will interfere with Lessee’s enjoyment of its leasehold interest due to an act or omission of the Lessor. • NO implied warranty against infringement or the like by Lessor in finance lease. [§ 2A–211(1)]
Warranties Against Interference and Infringement • Lessor who was a merchant dealing in goods of the kind (no finance lease) makes implied warranty against infringement or the like. [§ 2A–211(2)]
If Lessee furnishes specifications to the Lessor or Supplier for goods, Lessee must hold Lessor and Supplier harmless against any claim of infringement that arises out of compliance with specifications. [§ 2A–211(3)]
Implied Warranties of Merchantability and Fitness for a Particular Purpose • Merchantability – if Lessor is a merchant, applies just like § 2-314, but NOT if finance lease. [§ 2A–212] • Fitness for a Particular Purpose – except in finance lease, Lessor makes fitness warranty if Lessee relies on Lessor’s skill or judgment to select or furnish suitable goods. [§ 2A–213]
Exclusion or Modification of Warranties • Merchantability Exclusion – must mention merchantability and in case of a writing, must be conspicuous. • Implied Warranty of Fitness – exclusion must be in writing and conspicuous; all implied warranties of fitness are excluded by statement that “there are no other warranties which extend beyond description on the face hereof.” [§ 2A–214(2) = § 2–316(2)]
Unless circumstances indicate otherwise, all implied warranties are excluded by expressions like “as is,” “with all faults,” or other language which in common understanding calls the Lessee’s attention to the exclusion of warranties and makes plain there is no implied warranty. [§ 2A–214(3) = § 2–316(3)]
Third–Party Beneficiaries/Privity [§ 2A–216 = § 2–318] • Generally extends warranty liability of Lessor to either Lessee’s family and guests, or others likely to consume or be affected by the goods if they are injured, depending on which alternative is adopted. • California omits this section in its entirety.
Majority of states extend coverage to any natural person reasonably expected to use, consume, or be affected by the goods who was injured. • Liability flowing from this section cannot be modified or limited.
Risk of Loss • Except in the case of the finance lease, risk of loss is retained by the Lessor and does not pass to the Lessee. In the case of the finance lease, risk of loss passes to the Lessee. [§ 2A–219(1)]
Risk of Loss • Where the contract requires or authorizes the goods to be shipped by carrier: • If the contract does not require delivery of the goods to a certain destination, risk of loss passes to Lessee when goods are delivered to carrier. • If contract requires goods to be delivered to a particular destination and goods are duly tendered, risk of loss passes to Lessee when they are duly tendered. [§ 2A–219(2) = § 2–509(1)]
Risk of Loss • If goods are held by a bailee and delivered without being moved, risk of loss passes to Lessee upon acknowledgement by the bailee of the Lessee’s right to possess the goods. [§ 2A–219(2)(b) = § 2–509(2)]
Risk of Loss • In any other case, the risk of loss passes to the Lessee on his receipt of the goods if the Lessor, or in the case of a finance lease, the Supplier, is a merchant; otherwise, the risk passes to the Lessee on tender of delivery. [§ 2A–219(2)(c) = § 2–509(3)]
Effect of Default on Risk of Loss • Where tender or delivery of goods so fails to conform to the contract as to give the right of rejection, risk of loss remains on Lessor until cure or acceptance. • If acceptance is rightfully revoked by Lessee, Lessee may, to the extent of any deficiency in his insurance coverage, treat the risk of loss as having rested on the Lessor from the beginning. [§ 2A–220 = § 2–510]
Part 3: Effect of Lease Contract Article 2A
Alienability of Parties’ Interest Under Lease Contract; Delegation of Performance; Transfer of Rights • Generally, the interest of a party under a lease contract, including a sublease, may be assigned or transferred. However, if the lease makes transfer an event of default or prohibits such a transfer, the non-transferring party still has the right to collect related default damages. [§ 2A–303]
§ 2A–303 is “self–executing” and these transfer rights do not need to be included in an agreement for them to be effective.
Lien Priority • If a person in the ordinary course of business furnishes services or materials with respect to goods subject to a lease contract, a lien upon those goods given by statute or rule of law for those materials or services takes priority over the interest of the Lessor or Lessee under the lease contract, unless provided otherwise by law. [§ 2A–306]
Part 4: Performance of Lease Contract: Repudiated, Substituted, and Excused Article 2A
Insecurity: Adequate Assurances of Performance • Either party may demand adequate assurances of due performance in writing and may suspend performance for which he has not already received the agreed return. • Between merchants, the reasonableness of grounds for insecurity and adequacy of assurances offered is determined according to commercial standards. [§ 2A–401 = § 2–609]
Insecurity: Adequate Assurance of Performance • After receipt of a justified demand, failure to provide within a reasonable time, not to exceed 30 days, such assurances of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract. [§ 2A–401 = § 2–609]
Anticipatory Repudiation • Where either party repudiates a lease contract with respect to a performance not yet due, and the loss of such performance substantially impairs the value of the lease contract to the other, the aggrieved party has several options: • For commercially reasonable time await performance by the repudiating party, or • Resort to any remedy for default, or • In either case to suspend his own performance. [§ 2A–402 = § 2–610]
Retraction of Anticipatory Repudiation • Until the repudiating party’s next performance is due, he can retract his repudiation unless the aggrieved party has since the repudiation cancelled or materially changed his position or otherwise indicated that he considers the repudiation final. Such retraction must include required assurances. [§ 2A–403 = § 2–611]
Excused Performance • A Lessor or a Supplier is not in default under the lease contract if delay in delivery or non-delivery has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with governmental regulation or order. [§ 2A–405 = § 2–615(a)]
Excused Performance • However, Lessor or Supplier must, to the extent only a portion of his capacity is affected, allocate production and deliveries among customers in a fair and reasonable manner and must notify the Lessee seasonably that there will be a delay or non-delivery. [§ 2A–405 = § 2–615]
Procedure on Excused Performance • If the Lessee receives notification of material or indefinite delay, the Lessee may, by written notification to the Lessor as to any goods involved, and with respect to all of the goods, if under an installment lease contract, value of the whole lease contract is substantially impaired, the Lessee may: • Terminate the lease contract, or • Except a finance lease that is not a consumer lease, modify the lease contract by accepting the available quota with due allowance for related rent but without further right against the Lessor. [§ 2A–406]
Irrevocable Promises: Finance Leases • In the case of the finance lease that is not a consumer lease, a Lessee’s promises under the lease contract become irrevocable and independent upon the Lessee’s acceptance of the goods. • Also enforceable by or against third parties including assignees of the parties. • Not subject to cancellation, termination, modification, excuse, etc., without the consent of the party to whom the promise runs. [§ 2A–407]
This “hell or high water” clause is self-executing, and no special provision need be added to the contract. • EXAMPLE: Lessee has no ability to take “set off” or stop payment if leased equipment malfunctions due to a breach of warranty; Lessee’s remedy is against the Supplier, and Lessee must continue to make payments to Lessor.
Part 5: Default Article 2A
Default Procedure • Parties to the lease can avail themselves of rights and remedies in the lease as well as those in the Article; rights and remedies are cumulative unless stated otherwise in the lease or the Article. • If the lease covers both real property and goods, the party seeking enforcement may proceed under the Article with respect to that portion relating to the goods, or proceed under real property law with respect to both. [§ 2A–501]
Notice After Default • Except as otherwise provided in the Article or the lease agreement, the Lessor or Lessee in default under the lease contract is not entitled to notice of default, or notice of enforcement from the other party. [§ 2A–502] • Weasel catcher …
Modification or Limitation of Remedies • Rights and remedies may be different than, or in addition to, the Article and also may be limited by lease agreement. • Remedies are cumulative unless stated to be sole and exclusive. [§ 2A–503]
Limitation of Remedies • If exclusive remedy fails of its essential purpose, other remedies are available. • Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. • Limitation of consequential damages for injury to a person in case of consumer goods is unconscionable, but limitation of damages where the loss is commercial is not. [§ 2A–503 = § 2–719]
Liquidated Damages • Damages for breach by either party may be liquidated in the lease agreement, but only at an amount which is reasonable in light of the anticipated or actual harm cause by the default, including indemnity for loss or diminution of anticipated tax benefits or loss or damage to Lessor’s residual interest. [§ 2A–504]
Liquidated Damages • No reference to large liquidated damages void as a penalty as in § 2–718, but still limited by reasonableness. [§ 2A–504]