2. 1 1 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 Number: F17 Presenters: Allen L. Anderson; Fees & Burgess, P.C. Ryan Blount; Fees & Burgess, P.C. Date: July 31, 2012 Time:4:00 p.m. – 5:15 p.m.

3. 2 2 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 Article 2A

4. 3 3 Part 1: General Provisions

5. 4 4 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.

6. 5 5 “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)]

7. 6 6 “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)]

8. 7 7 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

9. 8 8 “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.

10. 9 9 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] Consumer Leases – Choice of Law

11. 10 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] Judicial Forum

12. 11 Article 2A Part 2: Formation and Construction of Lease Contract

13. 12 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] Statute of Frauds

14. 13 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]

15. 14 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]

16. 15 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] Lessee Under Finance Lease as Beneficiary of Supply Contract

17. 16 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

18. 17 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)] Warranties Against Interference and Infringement

19. 18 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)]

20. 19 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] Implied Warranties of Merchantability and Fitness for a Particular Purpose

21. 20 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)] Exclusion or Modification of Warranties

22. 21 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)]

23. 22 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. Third–Party Beneficiaries/Privity [§ 2A–216 = § 2–318]

24. 23 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.

25. 24 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

26. 25 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

27. 26 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

28. 27 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)] Risk of Loss

29. 28 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] Effect of Default on Risk of Loss

30. 29 Article 2A Part 3: Effect of Lease Contract

31. 30 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] Alienability of Parties’ Interest Under Lease Contract; Delegation of Performance; Transfer of Rights

32. 31 § 2A–303 is “self–executing” and these transfer rights do not need to be included in an agreement for them to be effective.

33. 32 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] Lien Priority

34. 33 Article 2A Part 4: Performance of Lease Contract: Repudiated, Substituted, and Excused

35. 34 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 Assurances of Performance

36. 35 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] Insecurity: Adequate Assurance of Performance

37. 36 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] Anticipatory Repudiation

38. 37 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] Retraction of Anticipatory Repudiation

39. 38 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

40. 39 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] Excused Performance

41. 40 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] Procedure on Excused Performance

42. 41 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] Irrevocable Promises: Finance Leases

43. 42 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.

44. 43 Article 2A Part 5: Default

45. 44 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] Default Procedure

46. 45 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 … Notice After Default

47. 46 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] Modification or Limitation of Remedies

48. 47 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] Limitation of Remedies

49. 48 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

50. 49 No reference to large liquidated damages void as a penalty as in § 2–718, but still limited by reasonableness. [§ 2A–504] Liquidated Damages

51. 50 An action for default under a lease agreement must be commenced within four years after the cause of action has accrued. Parties may agree to reduce this to not less than one year, but may not extent it. [§ 2A–506 = § 2–725] Statutes of Limitation

52. 51 Cancel the lease contract. Recover so much of the rent and security as has been paid and is just under the circumstances. “Cover” and recover damages. Exercise any other rights or pursue any other remedies provided in the lease contract. Recover the goods if they have been identified. In a proper case, obtain specific performance. [§ 2A–508] Lessee’s Remedies

53. 52 Lessor or Supplier can cure a non-conforming tender prior to expiration of time for performance and within a reasonable time where Lessor or Supplier has reasonable grounds to believe the tender would be acceptable if he seasonably notifies Lessee of intent to substitute conforming tender. [§ 2A–513 = § 2–508] Cure by Lessor or Supplier of Improper Tender

54. 53 After default by Lessor, the Lessee may cover by making any purchase or lease of, or contract to purchase or lease, goods in substitution. Cover; Substitute Goods

55. 54 Lessee may recover present value, as of the date of the commencement of the term of the new lease agreement, of the rent under the new lease agreement applicable to the period of the new lease term which is comparable to the then-remaining term of the original lease minus the present value as of the same date of the total rent for the then-remaining lease term and incidental and consequential damages, less expenses saved. [§ 2A–518] Extent of Cover

56. 55 If Lessee has not accepted the goods, the Lessee may recover the present value, as of the date of the default, of the then-market rent minus the present value as of the same date of the original rent, computed for the remaining lease term of the original lease agreement, together with incidental and consequential damages, less expenses saved. [§ 2A–519(1)] Lessee’s Damages for Non-Delivery, Repudiation, Default, and Breach of Warranty in Regard to Accepted Goods

57. 56 The measure of damages for non-conforming tender or delivery or other default is the loss resulting in the ordinary course of events from the Lessor’s default, as determined in any manner that is reasonable together with incidental and consequential damages, less expenses saved. [§ 2A–519(3)] Lessee’s Damages for Accepted Goods

58. 57 The measure of damages for breach of warranty is the present value at the time and place of acceptance of the difference between the value of the use of the goods accepted and the value if they had been as warranted for the lease term, unless special circumstances show proximate damages of a different amount, together with incidental and consequential damages, less expenses saved. [§ 2A–519(4)] Lessee’s Damages for Breach of Warranty

59. 58 Incidental damages resulting from a Lessor’s default include expenses reasonably incurred in inspection, receipt, transportation, and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses, or commissions in connection with effecting cover, and any other reasonable expense incident to the default. [§ 2A–520(1)] Lessee’s Incidental Damages

60. 59 Consequential damages resulting from a Lessor’s default include any loss resulting from general or particular requirements and needs of which the Lessor at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise and injury to persons or property proximately resulting from any breach of warranty. [§ 2A–520(2)] Lessee’s Consequential Damages

61. 60 Lessee’s right to specific performance allowable where goods are unique or in other proper circumstances may include any relief the court may deem just. [§ 2A–521 = § 2–716] Specific Performance

62. 61 If a Lessee wrongfully rejects or revokes acceptance of goods, or fails to make a payment when due, or repudiates with respect to a part or the whole, or if the Lessee is in default under the lease contract, the Lessor has several remedies which may be exercised as options with those in the lease agreement. HOWEVER, such options are not available from the Article if any damages liquidated in the lease agreement or determined by the lease agreement are stated to be exclusive. Lessor’s Remedies

63. 62 Cancel the lease contract. [§ 2A–505(1)] Proceed respecting goods not identified to the lease contract. [§ 2A–524] Withhold delivery of the good and take possession of the goods previously delivered. [§ 2A–525] Stop delivery of goods by any bailee. [§ 2A–526] Lessor’s Remedies

64. 63 Dispose of the goods and recover damages. [§ 2A–527] Retain the goods and recover damages. [§ 2A–528] In a proper case, recover rent. [§ 2A–529] Exercise any other rights, or pursue any other remedies, provided in the lease contract. Lessor’s Remedies

65. 64 If the Lessor discovers the Lessee is insolvent, the Lessor may refuse to deliver the goods. After default, the Lessor may require the Lessee to assemble the goods and make them available to the Lessor and render unusable any goods employed in trade or business by the Lessee. No need for judicial process if there is no breach of the peace. [§ 2A–525] Lessor’s Right to the Goods

66. 65 If the disposition is by lease agreement substantially similar to the original lease agreement and made in good faith in a commercially reasonable manner, the Lessor may recover:  The accrued and unpaid rent as of the date of commencement of the term of the new lease agreement.  The present value, as of the same date, of the total rent for the then–remaining lease term of the original lease agreement minus the present value for rent for the remaining original lease agreement.  Incidental damages less expenses saved. [§ 2A – 527(2)] Lessor’s Right to Dispose of Goods

67. 66 Except as otherwise provided as liquidated damages in the lease agreement, or otherwise determined pursuant to the agreement of the parties, if Lessor:  Elects to retain the goods and that disposition is by lease agreement that does not qualify for treatment under § 2A–527(2), or Lessor’s Damages for Non-Acceptance, Failure to Pay, Repudiation, or other Default

68. 67  Is by sale or otherwise, Lessor may recover: Accrued and unpaid rent as of the date of default, if the Lessee has never taken possession of the goods, or If the Lessee has taken possession of the goods, as of the date the Lessor repossesses the goods, the present value as of the date of default of the total rent for the then- remaining lease term of the original lease agreement minus the present value of the same date of the market rent. Plus incidental damages, less expenses saved. [§ 2A–528]

69. 68 Lessor may recover accrued and unpaid rent as of the date of entry of judgment in favor of the Lessor and the present value for the remaining lease term plus incidential damages, less expenses saved. [§ 2A–529] Lessor’s Action for the Rent

70. 69 Incidental damages to an aggrieved Lessor include any commercially reasonable charges, expenses, or commissions incurred in stopping delivery and the transportation, care, and custody of the goods after the Lessee’s default, in connection with return or disposition of the goods, or otherwise resulting from the default. [§ 2A–530] Lessor’s Incidental Damages

71. 70 Questions?