UCC Article 2A: Friend or Foe?

Uniform Commercial Code Article 2A is a proposed set of laws relating to personal property leasing. As of this writing, Article 2A has been adopted in 47 states and the District of Columbia (excluding only Louisiana, South Carolina and Vermont). Virtually every form of equipment lease used by major leasing companies states that it is governed by the laws of one of the states which has adopted Article 2A.

Article 2A makes many changes in existing law which are beneficial to both lessors and lessees. These changes, essentially, standardize state law so that the lessor is unable to select favorable quirks in the law of its home state.

On the other hand, Article 2A may contain traps for the unwary.

For example, it should always be remembered that Article 2A supports provisions commonly found in equipment leases, under which a lessee has no right to require the lessor to repair or replace defective equipment or to withhold rents while defective equipment is being repaired. This "hell or high water" protection applies only to lessors who are not, in fact, the manufacturer or other vendor of the leased equipment. If the lease from such a lessor qualifies, it will be a UCC-2A "finance lease."

On balance, such a provision is not unreasonable as finance lease lessors are really in the position of a bank making a secured loan: They neither select the equipment nor manufacture it, but merely provide financing. On the other hand, a lessee in a finance lease must be particularly sensitive to preserving the warranties provided by the actual equipment vendor.

Under UCC §2A-102(g), the definition of "finance lease", a lessor may merely providing the lessee a statement directing it to obtain warranty information from the equipment vendor. With the exception of six states (including Florida and Illinois) which have not adopted this specific language, it is up to the lessee to contact the vendor and make sure that it fully understands its warranties. Otherwise, the lessee will be in the position of continuing to pay rent to the "innocent" finance lessor while at a disadvantage arranging repair or restitution from the vendor of defective equipment.

Other provisions of Article 2A make it clear that the lessor may assign the lease to a third party, who will take the lessor's right to receive rent, but none of its obligations, notwithstanding contrary language of the lease. If so stated in the lease, some assignments could create a default by the lessor, giving the lessee right to damages; even this would not affect the ability of the assignee to enforce provisions of the lease against the lessee.

Message: If you are serious about keeping the lease in the hands of your original lessor, you should not rely on language in the lease which purports to prohibit assignment by the lessor without your consent.

Many lessor forms require the lessee to waive various rights granted to the lessee under Article 2A. On the whole, these waivers are probably enforceable. In some cases, such a request is entirely reasonable as Article 2A covers a broad range of equipment lease types and some provisions may be inapplicable and confusing to a judge. On the other hand, the lessee may often be requested to waive provisions which could be invaluable to it, particularly in a lease from a vendor or manufacturer of the equipment, or the affiliate of such an entity.

As we have in the past, we continue to recommend that lessees prepare their own lease forms, particularly for recurring small-ticket and middle-market transactions.