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UCC Article 2A — Case Law Gains Traction Toward Presumed Enforceability of Finance Leases Against the Typical Challenges Raised By Lessees
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UCC Article 2A — Case Law Gains Traction Toward Presumed Enforceability of Finance Leases Against the Typical Challenges Raised By Lessees

Evolving case law continues to advance the public policy favoring finance leases codified in UCC Article 2A.  Finance leases are an important alternative means for many businesses to acquire needed equipment they may not be able to (or choose not to) purchase using traditional finance options.   

Generally, the explicit terms of a Lease Agreement, as well as its structure, define whether it is in fact a finance lease governed by UCC Article 2A-103(g).  California Article 10103(a)(7) defines the components of finance leases under state law. 

An important aspect of UCC Article 2A is that the Article gives parties the right to make a binding stipulation that a contract will be governed by the Article, even if the terms of the contract do not meet the specific finance least test set forth in UCC Section 2A-103(g). 

Such a stipulation was upheld as enforceable in De Lage Landen Financial Services, Inc. v. Rasa Floors[1] by the U.S. District Court for the Eastern district of Pennsylvania.

“[E]ven if a transaction does not qualify as a finance lease, the parties may achieve the same result by agreement.  …  As parties to valid finance lease transactions, [Rasa’s] payment obligations “under the lease contract [became] irrevocable and independent upon [Rasa’s] acceptance of the goods,” pursuant to [UCC §2A-407(a) and (b)], which extends the classic ‘hell or high water’ clause to a finance lease that is not a consumer lease.”(“If an agreement qualifies as a finance lease under the UCC, an express hell-or-high-water clause is unnecessary because such a provision automatically attaches to a finance lease by statute.”)

De Lage, 792 F. Supp. at 828 (internal citations omitted).

California Commercial Code Section 10407, likewise extends the classic ‘hell or high water’ clause to non-consumer finance leases.  The hell or high water clause is vital the finance lessor, because it requires the lessee to continue making payments to the lessor, regardless of any difficulties the lessee may encounter, usually in connection with the operation of the leased asset.

Case law such as De Lage upholds the parties’ stipulation for a contract to be governed as a finance lease under UCC Article 2A, and bolsters the presumptive enforceability of similar stipulations across the board.  Those stipulations ensure lessors’ protection under the Article’s inherent high or high water provisions, rendering lessees’ typical defenses of substantive unconscionability, procedural unconscionability, and breach of contract moot.

If you are a lessor in a finance lease, be certain you are fully informed of these and other nuances of UCC Article 2A and corresponding California law.  The attorneys at Glass & Goldberg provide high quality and cost-effective legal services and advice for clients in all aspects of business litigation and transactional law.  Call us at (818) 888-2220, email us at info@glassgoldberg.com, or visit us on the web at www.glassgoldberg.com to learn more about the firm and to sign up for future newsletters.


[1] De Lage Landen Financial Services, Inc. vs. Rasa Floors, et al., 269 F.R.D. 445 (E.D.Pa. 2010) and 792 F. Supp. 2d 812 (E.D.Pa. 2011).

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