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Assuring the Lessors' Protections Afforded By the Finance Lease
Generally, the lessor/lessee relationship is governed by Article 2A of the Uniform Commercial Code (the “UCC”). In many respects, Article 2A mirrors Article 2, treating ordinary lessors like sellers. 2 James J. White & Robert S. Summers, Uniform Commercial Code '13-3 (4th ed. 2005). For example, under UCC '2A-210 the ordinary lessor has express warranty liability similar to that incurred by a seller under UCC '2-313. Additionally, Sections 2A-212 and 2A-213 impose the familiar warranties of merchantability and fitness for a particular purpose on ordinary lessors. A lessee can assert the lessor's breach of these warranties by effectuating setoff, by suit for damages or by withholding performance. Id. Furthermore, where the lessee has filed a petition for relief under Title 11 of the United States Code (the “Bankruptcy Code”), the debtor-lessee may object to the allowance of the creditor-lessor's claim for rejection damages by asserting that the leased equipment was defective or unsuitable for the lessee's particular business.
Despite the similarities between the UCC's treatment of Sales and Leases, Article 2A affords special rights to the “finance lessor.” This article examines these rights and the impact of the relevant legal decisions upon them in order to provide finance lessors some insight as to what needs to be done to safeguard these rights.
The UCC's specialized treatment of finance lessors is based upon the reasonable expectations of the parties in these types of transactions. A traditional finance lessor purchases equipment at the lessee's direction for the sole purpose of “leasing” it to the lessee purely as a method of financing. Thus, the lessee has no reason to expect that the finance lessor would assume responsibility if the equipment is unsuitable or defective. Rather, the parties would expect the manufacturer and/or supplier of the equipment to be held accountable in this respect. This expectation of the parties is codified at UCC '2A-209, which provides that the supplier's promises and warranties pass through the finance lessor and extend to the finance lessee. UCC '2A-209(a). Moreover, since the finance lessor has no control over the manufacture or supply of the equipment, the normal expectations of the parties are that the finance lessor will be entitled to payment for its extension of the financing, regardless of the defectiveness or unsuitability of the equipment.
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