Commercial Lease Contract Defaults Under the UCC

Find out what constitutes default under a UCC-governed lease agreement involving vehicles or equipment or machinery -- and what remedies are available.

Leases covered by the Uniform Commercial Code (UCC) relate to personal property, or goods, such as vehicles, machinery, and equipment, as opposed to real estate. Most of the rules for these lease contracts are presented in UCC Article 2A, which contains nearly 80 individual sections. Among these many rules are several that are concerned with defaulting on a lease contract and remedies in the case of default.

Note:  Lease contracts involve two parties: (1) the  lessor, which is the party that owns the leased goods and is making them available for lease, and (2) the  lessee, which is the party leasing the goods for temporary use.

A party is in default on a lease contract if it fails to meet its obligations under that contract. When one party defaults on a lease contract, the other party has the right to a remedy for that default. One section of the UCC states that both the lessor and lessee should look to the lease contract to determine if a party has defaulted. Other sections, however, provide rules regarding default on leases that are adapted from the UCC’s rules on default for sales. More particularly, the UCC indicates that a lessor has an obligation to deliver goods that strictly conform to the lease contract, and that a lessee has the right to reject “non-conforming” goods within a reasonable time after delivery, so long as the lessee also gives reasonably prompt notice of the rejection to the lessor. (This UCC requirement to deliver, or tender, strictly-conforming goods is generally known as the perfect tender rule.)

Another UCC lease rule borrowed from the UCC’s sales rules is the right of a lessor to cure an improper tender or delivery. If a lessor delivers goods that don’t match the contract, and the lessee rejects those goods, the UCC gives the lessor an opportunity to fix the problem. The lessor has the right to cure in two specific situations:

  • where goods were rejected because of non-conformity, but the lessor still has time under the contract to provide conforming goods; or
  • where the lessor had “reasonable grounds to believe” that the non-conforming goods delivered to the lessee would be acceptable to the buyer, with or without a “money allowance” (discount).

An example of the first situation would be a lessor who, under a lease contract, has until June 30 to deliver goods to a buyer, and delivers defective goods on June 15, which the lessee immediately rejects; the lessor would still have until June 30 to deliver conforming, non-defective goods to the lessee. An example of the second situation might involve a lessor delivering “better” goods to a lessee—such as a more expensive, higher-quality model of a device, with more features, which the lessee nonetheless rejects; the lessor likely would have the right, within a reasonable time, to provide the model actually ordered by the lessee.

The UCC mentions several situations where a lessee, as opposed to a lessor, would be in default. Perhaps the most important of these is where a lessee fails to make payments as required under the lease contract. Other situations include a lessee wrongfully rejecting or revoking acceptance of the goods delivered by the lessor. (Under the UCC, “rejection” and “revocation” are two separate actions.) For example, a lessee may refuse to accept a leased machine delivered by the lessor simply because the lessee has decided he or she no longer needs or wants the machine. Where a lessee defaults, the UCC mentions several possible remedies for the lessor, including cancelling the lease contract, withholding delivery of any further goods, repossessing goods previously delivered, and exercising any other remedies allowed for in the lease contract.

The general rule under the UCC is that the party in default is not entitled to notice of its default by the other party; instead, the other party may take steps to enforce the lease without giving notice. For example, if a lessee fails to make lease payments on leased business equipment, a lessor may have the right to repossess the equipment without prior notice to the lessee.

Finally, the UCC does place some limitations on possible remedies. One limitation is that remedies generally may not be unconscionable. The determination of what is unconscionable is, in turn, generally a matter to be determined by a court.

Final Note:  This article is based on the current version of the model Uniform Commercial Code (UCC). However, not all states have adopted all sections of the current model UCC. Moreover, the model UCC specifically leaves it to individual states to determine the precise wording of certain sections. Therefore, you should always check your own state’s commercial code for the most accurate information.

May 2013

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