When Does the UCC Not Apply?

There are many business-related contracts that the UCC does not cover, including real estate contracts, service contracts, and employment contracts.

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The Uniform Commercial Code (UCC) contains rules applying to many types of commercial contracts, including contracts related to the sale of goods, leasing of goods, use of negotiable instruments, banking transactions, letters of credit, documents of title for goods, investment securities, and secured transactions. However, there are also many business-related contracts that the UCC does not cover. Key among these are real estate contracts, service contracts, and employment contracts.

Real Estate Contracts

Let’s say you run a manufacturing business and you need to buy a new factory or warehouse. At some point, after you’ve looked around at different spaces and locations, you’ll sign a real estate sales contract (also called a purchase and sale agreement). Later, at a closing, you will sign additional documents, likely including contracts related to financing the purchase. Even though you are buying commercial real estate, the laws and rules for these real estate contracts will not be found in your state’s commercial code. Instead, you will need to look to other state laws, regulations, and court cases that specifically relate to real estate.

Or, let’s say you run a service-based business and you want to lease office space. Once you’ve settled on the space you want and discussed the details with the owner or management company, you’ll be presented with a commercial lease. That lease is a contract—but not one that is covered in the UCC. Like contracts related to the sale of commercial real estate, rules for contracts for leasing commercial real estate will instead be found in state real estate statutes and in court cases.

For real estate purchases, consider the document widely known as a “land contract,” or in some states, like California, a “real property sales contract.” This type of contract is made between the current real estate owner and the buyer, and is used to purchase the real estate from the current owner over time. Typically, the buyer will make monthly payments to the current owner for a period of several years. Once the buyer pays off the full amount due under the contract, title to the property is transferred from the current owner to the buyer.

In California, it is a section of the state’s Civil Code, not the Commercial Code, that defines this type of real estate contract: “‘A real property sales contract is an agreement in which one party agrees to convey title to real property to another party upon the satisfaction of specified conditions set forth in the contract and that does not require conveyance of title within one year from the date of formation of the contract.” The immediately following sections of the Civil Code go on to provide more particulars about real property sales contracts, covering such matters as transfer of the contract, recording the contract, and installment payments on the contract. Whether your own state calls it a land contract, a real property sales contract, or something else, you will need to look somewhere other than your state’s commercial code to find the rules governing this kind of contract.

The same general point applies to real estate leases. New York law is typical: lease laws are part of the state’s real property laws, not its commercial code.

For additional guidance on commercial real estate, check out the articles in this section of Nolo’s website.

Service Contracts

There are various ways in which you may find your business dealing with a contract related to services:

  • you might run a service-based business, such as repairing cars, painting houses, or doing interior decorating
  • your business might pay another person or company to provide services, such as writing specialized software, redesigning your office space, or providing high-speed Internet access; or
  • you might have a service contract with a company that repairs your office equipment if it breaks down.

All of these situations involve contracts between the service provider and the client or customer. Your state’s version of the UCC, however, will not provide guidance on these types of contracts.

Rules for some service contracts—in particular, services related to warranties or insurance—are frequently found among a state’s insurance laws. These laws are separate from a state’s commercial code. Illinois’s insurance statutes, for example, include the Service Contract Act, which covers “providers” who agree “to perform the repair, replacement, or maintenance . . . of any automobile, system, or consumer product.”

When it comes to your own business providing services, or to hiring an independent contractor to work for you, you may not find much help in your state’s statutes. Instead, you may need to rely on more general principles of contract law, which are largely found in common law, i.e., in court decisions. (There may, however, be certain laws relating specifically to consumer contracts that will be relevant.) In general, you will want these service contracts to state clearly what the service provider (either your service-based business, or the service provider you’re business is hiring) will and will not do. Note: You can find additional guidance on service contracts from this Nolo article and from these two Nolo books.

Employment Contracts

In many instances, if you hire an employee, there will not be a written employment contract. At most, there may be a written offer letter. In fact, in many cases, it may be inadvisable for you to be highly detailed about what you are offering an employee. However, notwithstanding these facts, employment generally involves at least some contractual aspects. The rules regarding those aspects will not be found in the UCC.

Some elements of employment contracts grow out of general contract law. For example, an oral contract is still a contract—and, more specifically, an implied contract—when it comes to employment. If you make an oral promise to cover moving expenses for a new employee, and then fail to keep that promise, you would be in breach of contract. You may find a court case in your state that speaks to this point—but, to repeat, you will find nothing about it in the UCC.

Also, if you make use of an employee handbook (which is frequently a good idea), that handbook may be considered a part of an employment contract unless the handbook contains a disclaimer. Again, to find out more details on that point, you would need to look not to a commercial code but to your state’s court decisions.

For more information on employment contracts, check the Nolo articles on the pros and cons of these contracts and firing employees with employment contracts.

May 2013

by: , Contributing Author

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