ULC

UCC Article 2,Sales and Article 2A, Leases (2003) Summary

Uniform Commercial Code (UCC) Article 2A - Leases, governs true leases of goods.  It was added to the Uniform Commercial Code in 1987, and amended in 1990.  It was the first article added to the UCC after its original promulgation in 1951, and responded to the enormous increase in the use of leases that began in the 1970's.  Leasing became used in that time as a method of financing transactions in goods.  In finance leases, lessor and lessee became analogous to creditor and debtor in these kinds of transactions.

In a true lease, the lessor gives possession and right to use the goods to the lessee for a fixed period of time in return for rent.  The title to the property and a meaningful residual interest remain with the lessor.  A “finance lease” is a true lease in which the lessor is not the fundamental supplier of the goods leased, but leases goods to lessees as a means of financing their acquisition from the supplier.  UCC Article 2A governs finance leases as true leases, but treats them differently in some respects from other true leases. For example, UCC 2A provides an implied warranty of quality, but since the lessor in a finance lease is not the source of the goods, the warranty does not run directly to the lessor.  The lessor passes through warranties given by the supplier under other law (principally a sale warranty of fitness) to the lessor, to the lessee.  UCC 2A provides for priority of lessor interests for finance leases, analogous to the concept of priority between creditors in secured transactions under UCC Article 9.  Great care was taken to establish finance leases as a separate financing category from secured transactions so that no doubt as to the method of establishing priority for any transaction would arise. 

UCC 2A was largely derived from UCC Article 2 - Sales, building upon the familiar law of sales contracts with provenance back to the original Uniform Sales Act of 1906 and continuing into Article 2, originally promulgated in 1951.  UCC 2A, like Article 2, is essentially the rules of contract for the specific kind of transaction.  Many of the rules for leases can be and are functionally the same as the rules for sales, but adapted to the lease transaction.  Like Article 2, Article 2A is primarily a set of default rules that may be waived or varied in the contract, with important exceptions such as the requirement of “good faith.”  UCC Article 2A provides basic contract rules, including rules for offer and acceptance of a contract, statute of frauds, warranties, assignment of interests, risk of loss and remedies upon breach of contract.

In 2003, another set of amendments has been promulgated by the American Law Institute and the Uniform Law Commissioners, the two organizations responsible for the Uniform Commercial Code.  Any statute, even one as relatively new as Article 2A is, needs to be updated, and 2003 is the occasion for a needed update.  Electronic transactions are a major reason for providing amendments in 2003, as will be noted later on.  Because amendments are individual and cover a large number of sections, it is not possible to cover every amendment in a short summary.  Here are some of the most important ones, however: 

1.  Electronic Transactions.  Technology has changed the face of transactions in goods and the law of leases must adapt to that reality.  Amendments substitute newly defined terms, record and sign, for every requirement for a writing or manual signature in Article 2A.  These newly defined terms include electronically stored documents and electronic signatures.  The 2003 amendments to Article 2A make electronic records and signatures the equivalent for enforcement purposes to paper documents and manual signatures.  In addition, amendments provide that an electronic record or signature is attributable to a person if it is that person’s electronic act or the act of that person’s electronic agent.  An amendment also provides that an electronic communication has legal effect even if no person is aware of its receipt, and that receipt of an electronic communication establishes that it was received, but not that the content received was the content sent. Contracts may clearly be formed through electronic agents.  These are fundamental rules for the conduct of electronic transactions, necessary to make them fully effective.  An amendment, also, assures that the rules for electronic transactions will not be preempted by federal law.

2.  Effect of Certificate of Title.  Goods, such as automobiles, which are often leased, are also subject to state certificate of title statutes, and there is a conflict of law problem that Article 2A addresses.  Prior Article 2A provides that goods registered under a certificate of title statute of a state remain subject to that law until either surrender of the certificate or when four months lapses once the goods have left the registering state.  There is a gap potential therefore, if a new certificate of title is not applied for within the four month period.  The amendments fill the gap.  The law of the state where a certificate of title originally is registered applies until a new certificate of title in another state becomes effective, and compliance is governed by the law of the original state until the new law becomes effective for the purposes of determining compliance with a certificate of title statute. 

3.  Warranties against Interference.  The lessee does not have title to goods leased.  The interference warranties in Article 2A, however, run to the lessee in much the same way warranty of title runs to the buyer in a sale, but to warrant the enjoyment of the benefits of the lease, not title.  The amendments articulate the warranty more specifically, but do not change their basic nature.  The lessor continues to warrant that no claim against the lessor will interfere with the lessee’s enjoyment.   The major addition to the warranty against interference is a “colorable claim to or interest in the goods which will unreasonably expose the lessee to litigation.”

4.  Liquidated Damages When Lessee Insolvent.   Any lease contract may state limitations on damages and/or liquidated damages for breach.  If a lessor, currently, withholds or stops delivery of goods when a lessee defaults or is insolvent, the lessee is entitled to restitution for the amount lease payments exceed the liquidated amount or, if none, 20% of present value or $500.00, whichever is the lesser amount.  The amended rule merely allows restitution for the amount lessee’s payments exceed the lessor’s entitlement when lessor’s damages are liquidated.  This better reflects actual damages and conforms to current practices. 

5.  Lessee’s Damages upon Lessor’s Breach of Contract.   The lessee’s general remedies for breach of contract by the lessor are more particularly and expressly provided in the 2003 amendments than is the case under original Article 2A.

6.  Lessor’s Remedies upon Lessee’s Breach of Contract. These remedies, like those of the lessee’s, are more particularly and expressly provided for. 

These amendments suggest modest updating and reflect revisions in Articles 1 and 9 of the UCC that have already occurred.  Enacting these amendments should be undertaken as soon as possible to keep UCC Article 2A - Leases, as current as possible.