Leases Bar Exam - Bar Exam Outlines

Leases: Article 2A

INTRODUCTION

• Article 2A generally follows Article 2 by substituting the term "lease" for the term "sale" but there are a few new or different rules in Article 2A

• Oklahoma has adopted Article 2A, so if it shows up, it will be in essay

SCOPE OF ARTICLE 2A

• Lease Defined

  • A "lease" is:

    • A "transfer of the right to possession and use of goods for a term in return for consideration"

    • "goods" identified same as in Article 2:

      • moveable at time of identification to the contract

  • Sublease Included

    • Lease includes a "sublease"

• Lease vs. Disguised Sale on Credit

  • Article 2A applies only to TRUE LEASES

    • If so called lease is really a sale of goods on credit, Article 2A doesn’t apply

      • Lessor really is a seller of goods and is also an Article 9 secured party who should take steps Article 9 requires for perfection of the interest in the goods

    • Test For Distinguishing a Lease from a Disguised Sale

      • Disguised Sale If:

        • Lessee has no right to terminate his obligation to pay during the lease term,

        • AND

          • Lease term (including mandatory renewals) is equal to or greater than the economic life of the goods or gives the 'lessee" an Option to Renew for the rest of the economic life for nominal or no additional consideration

          • OR

          • Lease provides that the "lessee" will become owner of the goods or has an option to purchase the goods for nominal or no additional consideration.

• Example

  • Sally agree sell tractor to Bob on credit. But for tax reasons they decide to disguise it as a lease. Draw up a "lease". So-called lease will run for 10 years, the entire useful life of the tractor. Lease not terminable by Bob, but Sally can repossess in event Bob doesn’t pay. Lease says at end of 10 years, goods become Bob's if pay $1.

    • This is not a true lease, but a sale of goods, and so governed by Article 2 and 9 if gonna take security interest

• Factors That by Themselves Don’t Indicate a Disguised Sale

  • Lessee pays consideration equal to or greater than FMV of leased goods (as long as doesn’t cover total economic life

  • Lessee has an option to renew the lease or become owner of goods

  • Lessee assumes major duties

    • Paying taxes, risk of loss, etc.

• Protective Article 9 Filing

  • For situations of doubt, article 9 allows lessors to make a protective filing under Article 9, file financing statement but use terms lessor and lessee instead of secured party and debtor

  • If alleged lease later found to be secured transaction, filing will protect seller from other creditors

ARTICLE 2 RULES COPIED

• In General

  • Just minor differences between 2 & 2A which are noted below

• Statute of Frauds

  • Lease must be in writing if the total payments under the lease will be $1000 or more.

    • Signed by party against whom enforcement sought

    • Describe leased goods & lease term

    • Indicate lease contract been made

    • QUANTITY OF LEASED GOODS

• No "Battle of the Forms" Provision

  • No battle of the forms provision

  • So, should be Mirror Image

• Consumer Protection

  • If lessee is consumer, a consumer lease arises

  • Rules for Consumer Leases:

    • Option to Accelerate at Will

      • If lease has a term allowing acceleration of the entire lease obligation at the will of the lessor, the term is enforceable only if the lessor exercises it in good faith

      • Burden on lessor to show good faith

• Unconscionability

  • 2A contains unconscionability section like Article 2, but does even further.

    • Substantive Unconscionability Not Required

      • Only requires procedural unconscionability

      • IF consumer lease has been induced by unconscionable conduct, the court may award appropriate relief even though the lease is otherwise fair.

      • Same rule applies if lessor engages in unconscionable conduct in the collection of a claim arising from the lease

        • Such as suing force or violence

    • Attorney Fees

      • Successful consumer permitted recover attorney fees

      • Amount of fees not limited by amount of recovery

      • If consumer loses lawsuit, & court finds consumer knew action groundless, consumer pay attny fees.

WARRANTIES

• In General

  • Lessor makes all the usual warranties made by a seller in Article 2

  • One MAJOR EXCEPTION:

• Finance Lease

  • In a "finance lease" lessee, instead of buying goods & financing the sale, has the lessor buy the goods from a seller (supplier) and then lease them to the lessee

    • If lessor is in business of selecting or manufacturing or selling the kinds of goods involved, NO FINANCE LEASE OCCURS.

    • Lessor must be true financer, and lessee must be the person who selects the goods or approves their purchase.

      • Ex. Waldo picks out car of dreams at car dealership, but for tax reasons did not want buy car but to lease it. Waldo goes to bank and gets them to buy the car and lease it to him for 3 years. This is a Finance Lease.

        • Bank= lessor

        • Waldo= lessee

        • Car Dealership= Supplier

    • Finance Lease Warranties:

      • Lessor makes NO IMPLIED WARRANTIES

      • Instead, ANY WARRANTIES, express or implied, MADE BY SUPPLIER to the lessor are PASSED ON TO LESSEE, who has direct cause of action against the supplier to extent of lessee's interest in the goods

  • The "Hell or High Water" Clause

    • Imposes absolute obligation on lessee to make payments to lessor no matter how badly the leased goods perform or break down.

      • Lessee is supposed to deal w/ supplier to work out problems & must keep making the lease payments in meantime.

    • Clause exists by law, whether in lease or not

      • Kicks in as soon as lessee "accepts' the goods

    • DOESN’T APPLY TO CONSUMER LEASES

REMEDIES

• Default by Lessor

  • Default by lessor gives lessee same rights and remedies the lessee would have had if the transaction had been a sale & Article 2 applied

    • May accept goods & recover damages for breach of warranty

    • Or

    • May reject goods and cover or seek the market price-lease differential

  • Revocation of acceptance allowed like under Article 2 (latent defects)

• Default by Lessee

  • Default by lessee invokes remedies similar to those given a seller in Article 2

  • Lessor, upon default, may

    • Cancel lease contract

    • Withhold delivery of goods

    • Take possession of previously delivered goods

    • Stop delivery of goods by a bailee

    • Dispose of or retain goods & recover damages, recover rent,

    • Or other rights provided for in lease contract

  • Lessor given right to repossess w/o court proceeding if NO BREACH OF PEACE

    • Limitation of Damages After Repossession

      • Lessor limited to actual damages, which lessor must prove

      • If lessor repossesses and then relets the goods to someone else, new lease is a mitigating factor & must be taken into account in computing damages

• Action for Rent

  • If substantial default by lessee, lessor may sue for entire future rent ONLY

    • If goods were neither repossessed by not tendered to the lessor

      • Ex. Have bee destroyed or ceased have value

  • Action for rent also lies where lessor proves that return of goods was in no way a mitigating factor

    • Ex. Where lessor proves to have inventory of the leased goods that would cover any number of rentals, so LOST VOLUME by lessee refusal go through with deal

PRIORITY DISPUTES

• Ability to Sublease

  • In spite of agreement to contrary, 2A allows subleasing (or any other transfer of the lease)

    • Sublease as Material Violate of Prime Lease

      • Transfer of lease in material violation of the terms of the prime lease is ground for default & gives rise to an action for damages, or allows court "to grant other appropriate relief, including cancellation of the lease contract or an injunction against the transfer

• Meaning of "Material"

  • Parties may set own standard, but 2A does not define

• Assignment of Right of Payment Allowed

  • When lessor has no remaining significant affirmative duties ("non-operating lease"), a transfer of a right to payment arising out of the lease is not a material transfer & is allowed even if agree otherwise

  • BUT, where lessor does have significant remaining duties, like maintenance of the property ("operating lease"), transfer of right to payment w/o agreement of lessee would be ground for default

• Security Interest in Lessor's Rights Allowed

  • Permits the lessor to grant a security interest in the lessor's interest under the lease despite an agreement to the contrary, and doesn’t allow the lesee to claim that this is a breach

• Rights of Sublessee

  • Generally sublessee subject to same terms of prime lease & gets not better rights in good than sublessor

  • Faces prospect of default by sublessor on prime lease & so repossession of leased goods

  • Exception:

    • Entrusting

      • If anyone entrusts goods to a merchant who deals in goods of that kind, a buyer or lessee in the ordinary course takes free of the claims of the entruster.

        • So if sublessor is someone who regularly leases goods to others, sublessee in the ordinary course of business would prevail over the prime lessor's rights in the leased goods.

• Creditor's Rights

  • Generally, creditor's of either party to lease get no better rights than their debtors have in the leased property

  • Creditors of lessor cannot levy on leased property in hands of lessee, and

  • Creditors of lessee cannot seize the leased property and appropriate it to pay debt owed by the lessee to the creditors

  • Exceptions:

    • Not a true...