Lease Obligations - Module 7 of 8
Module 7: Lease Obligations
As in the case of all contracts, and particularly under the UCC, both parties to a contract are saddled with certain obligations, most importantly, the duties of performance and good faith. In this module, we will focus on the obligations of both parties to a lease of goods agreement under Article 2A of the UCC.
The primary obligation of the lessor is to provide the goods in the lease. However, if the lessor is what is called a “finance lessor” then the primary obligation is to provide financing. A third party supplies the goods to the lessee. For example, in a car lease agreement, the lessor and the financer may be separate parties. You may get your Chrysler from your local dealership, but the financing might be provided by a company called Chrysler Capital. While both parties may have ties to the same parent company, they are different companies.
The determination of whether the lessor has provided suitable goods typically depends on Article 2A’s warranty provisions. These provisions are very similar to Article 2’s warranty provisions for the sale of goods. A lessor may create express warranties by affirmation of fact or promise, but mere opinion or “puffing” will not suffice to create an express warranty. A description of the goods, a sample, or a model that forms the basis of the bargain will suffice as an express warranty. So, for example, showing a car buyer a showroom model with certain features may constitute a warranty that the car will have those features (unless expressly disclaimed), but saying that the car is “great” or that the customer will “love it” does not constitute a warranty.
In general, Article 2A disfavors disclaimers of express warranties because it is seemingly contradictory to make an express promise and simultaneously disclaim that promise. So, if a salesperson tells a customer that the car has anti-lock brakes, but the paperwork signed by the lessee says otherwise, a court may not enforce the written disclaimer.
Finance lessors, who, as third parties, merely arrange for financing and are not directly involved with the goods, have a better chance of enforcing an express warranty disclaimer. So, if the salesperson says something about the financing that is contradicted in the financing paperwork, the paperwork may control. Note that in this vein, it is more reasonable to expect that the consumer understands that the financing is separate from the role of the salesperson and so the customer is less justified in relying on the salesperson in the terms of the financing.
The lessor may also be subject to implied warranties. Article 2A provides an implied warranty of quiet possession, which means that no one will interfere with the right to possess and use the goods during the lease term. Formerly, this was called the warranty against “interference,” but Articles 2 and 2A abolished that warranty with respect to the sales and leases of goods. The warranty of quiet possession may be disclaimed by writing that is “conspicuous.” Also, if the lessee has reason to know that the goods may be subject to a third party’s claim, then the lessee may be precluded from claiming a breach of the warranty of quiet possession.
The lessor additionally warrants that the goods are free from security or trademark infringement claims. This warranty may also be disclaimed in a conspicuous writing. Merely stipulating that the goods are leased “as is” in a lease agreement would be insufficient as a disclaimer. The lessor must, therefore, employ more robust language. This warranty may be unavailable to the lessee if the lessee had reason to know of an infringement claim.
For example, assume that Patrick Daniels, a farmer, leases three tractors from Acme Leasing and Finance Company. Acme bought the tractors on credit with a loan from First Bank and Acme discloses in its lease agreement that the tractors are provided subject to First Bank’s claim. If Acme defaults on its payments to First Bank and seeks to reclaim the tractors, then Daniels may be precluded from asserting a breach of quiet title claim because Daniels knew of First Bank’s rights in the tractors.
Implied Warranty of Merchantability
Article 2A also provides an implied warranty of merchantability for leased goods. Among other promises, the goods must be fit for the ordinary purposes for which goods of that type are used. The warranty of merchantability may be disclaimed in a conspicuous writing but will only be effective if the word “merchantability” is explicitly used in the disclaimer. As with an Article 2 sale, if a lessor has reason to know of any particular purpose for which the goods are required and also has reason to know that the lessee is relying on the lessor’s recommendations, then the lessor is subject to the warranty for a particular purpose.
So, while cars are not ordinarily built to travel easily on snow-covered roads, imagine that the lessee tells the salesperson that she needs a car that will travel easily on North Dakota back roads all year round. If the salesperson, nevertheless, leases her a car not built for snow travel, this could breach the implied fitness for a particular purpose.
A disclaimer may be invalidated under the doctrine of unconscionability. Also, if a lessee inspects the goods, then any implied warranty for the defects that the examination should reveal would be inapplicable. If the lessor requests that the lessee inspect the goods, but the lessee refuses to do so, then the implied warranty would be similarly inapplicable. As with many Code provisions, implied warranties may also be excluded or modified by course of performance, course of dealing or usage of trade.
The Lessee’s Obligations
The primary obligation of the lessee is to pay rent for the goods. Note that in a finance lease, the supplier of the leased goods is ultimately guaranteed by the lessor, not the lessee. So, for example, when Jane leases a car from Main Street Ford and the car is provided pursuant to a loan made by Ford Credit, Main Street Ford remains ultimately liable for lease payments although it is, of course, anticipated that Jane will be making the payments. So, if Jane fails to make the payments, whether wrongfully or because she has some legitimate defense (such as breach of warranty or a defect in the execution of the lease), Ford Credit can pursue Main Street Ford for the lease payments.
However, lessors may require that lessee’s sign what is known as a “hell or high-water clause.” This obligates the lessee to make payments independent of any defenses that might be viable against the lessor. Essentially, the lessee would have to keep paying the finance company but could sue the lessor for any damages due to any breach by the lessor.
These clauses are popular in finance leases and Article 2A specifically provides for their use in non-consumer finance leases. Under this type of clause, upon acceptance of the goods, a lessee’s obligation to pay becomes “irrevocable and independent.”
Although hell or high-water clauses have been largely upheld by the courts, such a clause will not protect a lessor from failure to give the lessee reasonable time to inspect the goods or from allegations of fraud.
For example, Patrick Daniels, a farmer, leases three tractors from Acme Leasing and Finance Company. The lease has a hell or high-water clause. Daniels inspected the tractors and they seemed fine. However, the tow hitches had cracks that rendered two of the tractors unsuitable for towing Daniels’ other farm equipment. Daniels might be precluded from using a breach of warranty claim to suspend payments under the hell or high-water clause. Often, though, these clauses are considered enforceable.
A further obligation of the lessee is to return the goods at the expiration of the lease term. Generally, throughout the course of the lease, it is the lessor who has the burden of any risk of loss unless the lease is a finance lease. In a finance lease, the risk of loss is on the lessee. For example, unless stated otherwise, if lightning strikes a leased car (which is obviously through no fault of any party), the lessee must simply return the car as it is at the end of the lease. This is often nullified, though, by clauses requiring the lessee to return the car in a certain condition.
In our next module, we’ll cover performance and breach in lease agreements.
 Uniform Commercial Code-Implied Warranty: Merchantability, §2A-212