TX Leases - UCC 2A

Question 1

How does Article 2A define leases?

Answer 1

A lease is a transfer of the right of a possession and use of goods for a term in return for consideration.

Article 2A covers lease or the sublease of goods.

Question 2

If the sale is for the sale of goods on credit (secured transaction), is this covered under Article 2A?

Answer 2

No. Article 2A only applies to true leases.

Question 3

What is a disguised sale on credit?

Answer 3

A disguised sale on credit does not fall under 2A and is characterized by:

(i) lessee has no right to terminate their obligation to pay during the lease term AND

(a) lease term ≥ entire economic life of goods or
lessee has option to renew for rest of economic life with nominal or no additional consideration; OR

(b) lessee will become the owner of the goods or has an option to purchase the goods for nominal or no additional consideration

Question 4

What if the lessee has the right to terminate the lease and return the goods at any time?

Answer 4

If yes, this is a true lease. Article 9 (secured transactions) does not apply.

Question 5

What is a disguised secured transaction?

Answer 5

It is a sale on credit that is disguised as a lease. The person must comply with Article 9 to protect their interest in the “leased” goods.

Question 6

How does the Statute of Frauds apply to leases?

Answer 6

A lease must be in writing if the total payments under the lease will be $1000 or more. The writing must be signed by the party against whom enforcement is sought, describe the leased goods (#) and term, and indicate that a lease contract has been formed by the parties.

Question 7

Does Battle of the Forms apply to leases or leased goods?

Answer 7

No. Article 2A doesn’t have this.

Question 8

What is the consequence if the lessee is a consumer?

Answer 8

If the lessee is a consumer, special rules apply:
- if there is a lease that has acceleration of the entire lease obligation at the lessor’s will, the option is enforceable only if exercised in good faith

• substantitive unconscionability not required - defense that consumer lease was induced by unconscionable conduct even if lease terms were fair
• if litigation, successful consumer gets attorneys’ fees, but if consumer knowingly brings a groundless suit can be held liable for lessor’s attorneys’ fees

Question 9

What is a finance lease?

Answer 9

The lessee has the lessor buy the goods from a seller (known as a supplier) and then lease them to the lessee. (aka when a consumer picks out a car, their bank buys it from the dealer, and the bank leases it to the consumer)

A finance lease only arises when the lessee selects the goods. If the lessor is a supplier, no finance lease.

Question 10

What are finance lease warranties?

Answer 10

A lessor does not make implied warranties in a finance lease, but any warranties made by the supplier to the lessee are passed on to the lessee to the extent of lessee’s interest. Lessee can sue the supplier.

There is also an absolute obligation on the lessee to make payments to the lessor no matter how badly the leased goods perform or break down. *Does not apply to consumer leases.

Question 11

What are a lessee’s remedies if lessor defaults under Article 2A for true leases?

Answer 11

If the lessor defaults, the lessee has the same rights and remedies as if the transaction had been a sale under Article 2. Basically, can accept the goods and recover damages or reject the goods and cover or seek the market price-lease differential.

Question 12

What are the lessor’s remedies if lessee defaults under 2A?

Answer 12

If the lessee defaults, lessor can cancel the contract, withhold delivery of the goods and take possession of previously delivered goods, stop delivery of goods, dispose of or retain the goods and recover damages, recover rent, or exercise any other rights or pursue any other remedies as specified in the lease.

Question 13

Does a lessor have the right to repossess if lessee defaults?

Answer 13

Yes, after a substantial default the lessor can repossess the leased goods as long as it can be done without a breach of the peace.

Question 14

T/F: A lessor’s damages are limited to actual damages caused by the breach.

Answer 14

True. UNLESS lessor has lost lease volume as a result of the breach, then lessor can recover damages of full rent/payment.

Question 15

When is subleasing permitted?

Answer 15

Subleasing is permitted is permitted, in spite of an agreement to the contrary. But if the transfer is a material violation of the prime lease, it is a ground for default and gives rise to damages/remedy.

Question 16

T/F: When the lessor has no remaining significant affirmative duties (aka, it’s a non-operating lease), the right to payment arising out of the lease can be transferred despite an agreement to the contrary.

Answer 16

True.

Question 17

If there is an operating lease, can the lessor transfer a right to payment without the agreement of the lessee?

Answer 17

No. When there is an operating lease, the lessor has significant remaining duties. Transferring the right to payment without the lessee’s consent would be a ground for default.

This differs for when the lease is non-operating.

Question 18

Can the lessor grant a security interest in the lessor’s interests under the lease?

Answer 18

Yes, even if there is an agreement to the contrary.

Question 19

What are the sublessee’s rights?

Answer 19

Generally, sublessee is subject to prime lease’s terms and gets no better rights than the sublessor had. So if the sublessor defaults on the prime lease, sublessor can repossess the leased good from the sublessee. Unless the goods are entrusted to a merchant who deals in goods of that kind.

Question 20

What are the creditor’s rights?

Answer 20

Creditors of either party generally get no better rights than their debtors have in the leased property. This means that creditors cannot seize the leased property and appropriate it to pay the debt owed by the lessee to the creditors.

Question 21

If there is a not a true lease, what are the creditor’s rights?

Answer 21

If there is not a true lease, it is instead a sale on credit. The “lessor” is really an unpaid seller. If the “lessor” has not perfected a security interest in the leased goods, the creditors of the lessee will prevail.

Question 22

What are statutory lienholders?

Answer 22

Artisans who perform work on a leased property have a lien on the property in their possession and this lien prevails over all overs as long as the artisan maintains possession.

Question 23

T/F: Lessor’s creditor whose lien or security interest attaches to the leased goods after the lease was in effect can realize on the leased property to the prejudice of the lessee.

Answer 23

False. Lessor’s creditor whose lien or security interest attaches to the leased goods after the lease was in effect CANNOT realize on the leased property to the prejudice of the lessee.

Question 24

What are a lessor’s pre-existing creditor’s rights?

Answer 24

If a lessor’s creditor’s lien or security interest attached prior to the lease, the creditor can repossess UNLESS the lessor leased the goods in the ordinary course of the lessor’s business to a lessee who gave value and was unaware that the lease was in violation of the creditor’s rights.

Question 25

All of the following Article 2A provisions are identical to their Article 2 counterparts EXCEPT:

A - Battle of the forms.

B - Parol evidence.

C - Assignment of rights.

D - Implied warranties.

Answer 25

The battle of the forms provision of Article 2 is not included in Article 2A.

Question 26

Under Article 2A, are terms allowing acceleration of the entire lease obligation of a consumer lease at the will of the lessor enforceable?

Answer 26

Yes, if exercised in good faith and lessor has the burden of proving.

Question 27

T/F: Article 2A’s rules on unconscionability do not require both procedural and substantive unconscionability.

Answer 27

True. If a consumer lease has been induced by unconscionable conduct, or if the lessor engages in unconscionable conduct in the collection of a claim arising from the lease (such as using force or violence) the court may award appropriate relief.

In consumer lease litigation, the successful consumer is permitted to recover attorneys’ fees. If the consumer loses the lawsuit and the court finds that the consumer brought an action that the consumer knew to be groundless, the consumer must pay attorneys’ fees to the lessor.

Question 28

T/F: In a finance lease, the lessor makes no implied warranties.

Answer 28

True. Any warranties, express or implied, made by the supplier to the lessor are passed on to the lessee.

Question 29

When can a lessee refuse to pay a lessor on a non-consumer finance lease?

Answer 29

A lessee can refuse to pay a lessor if the goods are not accepted.

In a finance lease there is an implied “hell or high water” clause, which creates an absolute duty to pay lessor. Any grievances must be worked out between the lessee and the supplier. This “hell or high water” clause duty is triggered when the lessee accepts the goods. Therefore, if the good is not accepted, the lessee can refuse to pay the lessor.

Question 30

T/F: A statutory lienholder is an exception to the general rule that creditors of either party to the lease get no better rights than their debtors have in the leased property.

Answer 30

True. A statutory lienholder is an exception to the general rule that creditors of either party to the lease get no better rights than their debtors have in the leased property.

Generally, creditors of the lessor cannot levy on the leased property in the hands of the lessee, and creditors of the lessee cannot seize the leased property and appropriate it to pay the debt owed by the lessee to the creditors. But the exceptions are: (i) when the lease is not a true lease, (ii) statutory lienholders, and (iii) lessor’s preexisting creditors.