ULC

UCC Article 2A, Leases (1987) (1990) Summary

Article 2A of the Uniform Commercial Code (UCC), when it was promulgated in 1987, marked the first addition to the UCC since its original promulgation in 1951. The subject of this new addition is Leasing, confined to the leasing of personal property. Most of the UCC is comprised of earlier uniform acts that were promulgated by the Uniform Law Commissioners between 1896 and 1947. Each Article had a substantial legal and legislative history before it was brought into the UCC.

UCC2A did not have the advantage of so much history. Leasing as a means of financing the acquisition of capital goods is a phenomenon of roughly the 20 years just preceding the promulgation of UCC2A. Therefore, the Uniform Law Commissioners and the American Law Institute, its partner in the UCC, were moving into new territory, entirely, in the promulgation of this new Article. To form an appropriate bridge between the familiar and the new, the drafters of UCC 2A modeled the new Article on the tried and familiar principles of UCC Article 2, the Sales Article. But inevitably, an effort to move into a new subject is an effort with some risks.

UCC 2A had its initial consideration in the California and Oklahoma legislatures. In California, it was subjected to an extensive study by the California Bar, and the scrutiny of others with interests in the area of leasing law. The result was a series of amendments to the act. Because of the large interest in this new piece of legislation, nationally, the California amendments were circulated throughout the country. There were more bar association studies, a symposium in the Alabama Law Review, and, finally, a review by the New York Law Revision Commission. Two things emerged from all this intense scrutiny: 1) The initial decision to follow the principles of UCC 2 was fundamentally the correct decision and the basic structure of UCC 2A is sound; and 2) Some issues needed to be readdressed by amendment.

The ULC was gratified by the first conclusion that universally arose from that scrutiny. It was not particularly surprised at the second. This is entirely new legislation. That further scrutiny might find some issues to address is a logical expectation. So the ULC has proceeded to address these very few issues with amendments in 1990.

Most of the amendments proposed in 1990 are meant to clarify specific provisions of the act or to readjust them in fairly minor ways. There are three significant issues that are addressed. The three issues addressed involve the definition of a finance lease, the power to restrict assignments in a lease contract, and the character of remedies in the event a lease contract is breached.

A finance lease is a lease in which the lessor does not supply the goods that are leased. The lessor acts as a financier for the acquisition of those goods. Under the original UCC 2A, a lease was not a finance lease unless the lessee received a copy of the contract between the lessor and the supplier of the goods evidencing the acquisition of the goods, or unless the lease contract conditioned its effectiveness upon the lessee's approval of the purchase contract between the lessor and the supplier of the goods. In many leasing situations, which involve finance leasing, the lessor cannot comply with these requirements, thereby losing the attributes of a finance lease. It is possible to satisfy the lessee's interest in the contract between lessor and supplier of the goods without the strict requirement of the original definition of finance lease.

In the amendments a lease qualifies as a finance lease if the lessor provides a statement of the terms of the supply contract or notifies the lessee where the information may be obtained from the supplier, as well as by providing the supply contract, itself.

Original UCC2A followed UCC 2 with respect to freedom of contract, including the freedom to contract for restrictions on either party's ability to assign rights or obligations. Freedom of contract is a primary underlying policy of both acts. However, there are some differences between sales and leases that make pure form freedom of contract an uneasy fit for leases. Finance lessors commonly assign a security interest in the right to receive rents under a lease contract to a lending institution. This security interest is a UCC 9 interest. In this aspect of leasing, the transaction more clearly resembles a secured transaction under UCC 9. As a matter of policy in protecting the rights of secured parties, UCC 9 limits the power of parties to certain kinds of contracts insofar as prohibition of assignment of rights as a security interest is concerned.

It was decided, therefore, to amend UCC Article 2A, following UCC Article 9 precedent, to limit the freedom of contract in lease contracts, but only for that narrow purpose of protecting the interests of secured parties. Thus a restriction on assignment rights cannot affect a holder of a security interest in the right to receive rents under a lease contract. Otherwise, freedom of contract is carefully preserved.

The third significant issue addressed in the UCC2A 1990 amendments appears in the aggregate of amendments to several sections in Part 5. This Part deals with remedies when a lease contract is breached. In the scrutiny to which UCC2A was subjected, it was pointed out that there is no way in original UCC2A to distinguish between material breaches of contract that allow the contract to be rescinded, fully, and breaches that are not so material as to call for absolute recision, but may still call for the payment of damages. The amendments answer this criticism.

These are the significant aspects of the 1990 amendments to UCC2A. They are provided in the spirit of enhanced uniformity, and will make the entire UCC2A a better act.