Rationale for Codification:
There are several reasons for codifying the law with respect to leases
of goods. An analysis of the case law as it applies to leases of goods suggests
at least three significant issues to be resolved by codification. First, what
is a lease? It is necessary to define lease to determine whether a transaction
creates a lease or a security interest disguised as a lease. If the transaction
creates a security interest disguised as a lease, the lessor will be required
to file a financing statement or take other action to perfect its interest
in the goods against third parties. There is no such requirement with respect
to leases. Yet the distinction between a lease and a security interest disguised
as a lease is not clear. Second, will the lessor be deemed to have made warranties
to the lessee? If the transaction is a sale the express and implied warranties
of article 2 of the code apply. However, the warranty law with respect to
leases is uncertain. Third, what remedies are available to the lessor upon
the lessee's default? If the transaction is a security interest disguised
as a lease, the answer is stated in part 5 of the Article on Secured Transactions
(Article 9). There is no clear answer with respect to leases.
There are reasons to codify the law with respect to leases of goods
in addition to those suggested by a review of the reported cases. The answer
to this important question should not be limited to the issues raised in these
cases. Is it not also proper to determine the remedies available to the lessee
upon the lessor's default? It is, but that issue is not reached through a
review of the reported cases. This is only one of the many issues presented
in structuring, negotiating, and documenting a lease of goods.
After it was decided to proceed with the codification project, the drafting
committee of the National Conference of Commissioners on Uniform State Laws
looked for a statutory analogue, gradually narrowing the focus to the Article
on Sales (Article 2) and the Article on Secured Transactions (Article 9).
A review of the literature with respect to the sale of goods reveals that
article 2 is predicated upon certain assumptions: Parties to the sales transaction
frequently are without counsel; the agreement of the parties often is oral
or evidenced by scant writings; obligations between the parties are bilateral;
applicable law is influenced by the need to preserve freedom of contract.
A review of the literature with respect to personal property security law
reveals that article 9 is predicated upon very different assumptions: Parties to a secured transaction regularly are represented by counsel;
the agreement of the parties frequently is reduced to a writing, extensive
in scope; the obligations between the parties are essentially unilateral;
and applicable law seriously limits freedom of contract.
The lease is closer in spirit and form to the sale of goods than to
the creation of a security interest. While parties to a lease are sometimes
represented by counsel and their agreement is often reduced to a writing,
the obligations of the parties are bilateral and the common law of leasing
is dominated by the need to preserve freedom of contract. Thus the drafting
committee concluded that article 2 was the appropriate statutory analogue.
The drafting committee then identified and resolved several issues critical
Scope: The scope of the article was limited to leases (section 2A-102). There
was no need to include leases intended as security, i.e., security interests
disguised as leases, as they are adequately treated in article 9. Further,
even if leases intended as security were included, the need to preserve the
distinction would remain, as policy suggests treatment significantly different
from that accorded leases.
Definition of Lease: Lease was defined to exclude leases intended as security (section 2A-103(1)(j)).
Given the litigation to date a revised definition of security interest was
suggested for inclusion in the code. (Section 1-201(37)). This revision sharpens
the distinction between leases and security interests disguised as leases.
Filing: The lessor was not required to file a financing statement against the
lessee or take any other action to protect the lessor's interest in the goods
(section 2A-301). The refined definition of security interest will more clearly
signal the need to file to potential lessors of goods. Those lessors who are
concerned will file a protective financing statement (section 9-505).
Warranties: All of the express and implied warranties of the Article on Sales (Article
2) were included (sections 2A-210 through 2A-216), revised to reflect differences
in lease transactions. The lease of goods is sufficiently similar to the sale
of goods to justify this decision. Further, many courts have reached the same
Certificate of Title Laws: Many leasing transactions involve goods subject to certificate of title
statutes. To avoid conflict with those statutes, this article is subject to
them (section 2A-104(1)(a)).
Consumer Leases: Many leasing transactions involve parties subject to consumer protection
statutes or decisions. To avoid conflict with those laws this article is subject
to them to the extent provided in section 2A-104(1)(c) and (2). Further, certain
consumer protections have been incorporated in the article.
Finance Leases: Certain leasing transactions substitute the supplier of the goods for
the lessor as the party responsible to the lessee with respect to warranties
and the like. The definition of finance lease (section 2A-103(1)(g)) was developed
to describe these transactions. Various sections of the article implement
the substitution of the supplier for the lessor, including sections 2A-209
and 2A-407. No attempt was made to fashion a special rule where the finance
lessor is an affiliate of the supplier of goods; this is to be developed by
the courts, case by case.
Sale and Leaseback: Sale and leaseback transactions are becoming increasingly common. A
number of state statutes treat transactions where possession is retained by
the seller as fraudulent per se or prima facie fraudulent. That position is
not in accord with modern practice and thus is changed by the article "if
the buyer bought for value and in good faith" (section 2A-308(3)).
Remedies: The article has not only provided for lessor's remedies upon default
by the lessee (sections 2A-523 through 2A-532), but also for lessee's remedies
upon default by the lessor (sections 2A-508 through 2A-522). This is a significant
departure from article 9, which provides remedies only for the secured party
upon default by the debtor. This difference is compelled by the bilateral
nature of the obligations between the parties to a lease.
Damages: Many leasing transactions are predicated on the parties' ability to
stipulate an appropriate measure of damages in the event of default. The rule
with respect to sales of goods (section 2-718) is not sufficiently flexible
to accommodate this practice. Consistent with the common-law emphasis upon
freedom to contract, the article has created a revised rule that allows greater
flexibility with respect to leases of goods (section 2A-504(1)).
This article is a revision of the Uniform Personal Property Leasing
Act, which was approved by the National Conference of Commissioners on Uniform
State Laws in August, 1985. However, it was believed that the subject matter
of the Uniform Personal Property Leasing Act would be better treated as an
article of the code. Thus, although the conference promulgated the Uniform
Personal Property Leasing Act as a uniform law, activity was held in abeyance
to allow time to restate the Uniform Personal Property Leasing Act as article
In August, 1986 the conference approved and recommended this article
(including conforming amendments to article 1 and article 9) for promulgation
as an amendment to the code. In December, 1986 the Council of the American
Law Institute approved and recommended this article (including conforming
amendments to article 1 and article 9), with official comments, for promulgation
as an amendment to the code. In March, 1987 the Permanent Editorial Board
for the Uniform Commercial Code approved and recommended this article (including
conforming amendments to article 1 and article 9), with official comments,
for promulgation as an amendment to the code. In May, 1987 the American Law
Institute approved and recommended this article (including conforming amendments
to article 1 and article 9), with official comments, for promulgation as an
amendment to the code. In August, 1987 the conference confirmed its approval
of the final text of this article.
Upon its initial promulgation, article 2A was rapidly enacted in several
states, was introduced in a number of other states, and underwent bar association,
law revision commission, and legislative study in still further states. In
that process debate emerged, principally sparked by the study of article 2A
by the California Bar Association, California's nonuniform amendments to article
2A, and articles appearing in a symposium on article 2A published after its
promulgation in the Alabama Law Review. The debate chiefly centered on whether
article 2A had struck the proper balance or was clear enough concerning the
ability of a lessor to grant a security interest in its leasehold interest
and in the residual, priority between a secured party and the lessee, and
the lessor's remedy structure under article 2A.
This debate over issues on which reasonable minds could and did differ
began to affect the enactment effort for article 2A in a deleterious manner.
Consequently, the Standby Committee for article 2A, composed predominantly
of the former members of the drafting committee, reviewed the legislative
actions and studies in the various states, and opened a dialogue with the
principal proponents of the nonuniform amendments. Negotiations were conducted
in conjunction with, and were facilitated by, a study of the uniform article
and the nonuniform amendments by the New York Law Revision Commission. Ultimately,
a consensus was reached, which has been approved by the membership of the
conference, the Permanent Editorial Board, and the council of the institute.
Rapid and uniform enactment of article 2A is expected as a result of the completed
amendments. The article 2A experience reaffirms the essential viability of
the procedures of the conference and the institute for creating and updating
uniform state law in the commercial law area.
Relationship of Article 2A to Other Articles:
The Article on Sales provided a useful point of reference for codifying
the law of leases. Many of the provisions of that article were carried over,
changed to reflect differences in style, leasing terminology, or leasing practices.
Thus, the official comments to those sections of article 2 whose provisions
were carried over are incorporated by reference in article 2A, as well; further,
any case law interpreting those provisions should be viewed as persuasive
but not binding on a court when deciding a similar issue with respect to leases.
Any change in the sequence that has been made when carrying over a provision
from article 2 should be viewed as a matter of style, not substance. This
is not to suggest that in other instances article 2A did not also incorporate
substantially revised provisions of article 2, article 9, or otherwise where
the revision was driven by a concern over the substance; but for the lack
of a mandate, the drafting committee might well have made the same or a similar
change in the statutory analogue. Those sections in article 2A include sections
2A-104, 2A-105, 2A-106, 2A-108(2) and (4), 2A-109(2), 2A-208, 2A-214(2) and
(3)(a), 2A-216, 2A-303, 2A-306, 2A-503, 2A-504(3)(b), 2A-506(2), and 2A-515.
For lack of relevance or significance not all of the provisions of article
2 were incorporated in article 2A.
This codification was greatly influenced by the fundamental tenet of
the common law as it has developed with respect to leases of goods: Freedom
of the parties to contract. Note that, like all other articles of the code,
the principles of construction and interpretation contained in article 1 are
applicable throughout article 2A (section 2A-103(4)). These principles include
the ability of the parties to vary the effect of the provisions of article
2A, subject to certain limitations including those that relate to the obligations
of good faith, diligence, reasonableness, and care (section 1-102(3)). Consistent
with those principles no negative inference is to be drawn by the episodic
use of the phrase "unless otherwise agreed" in certain provisions of article
2A. Section 1-102(4). Indeed, the contrary is true, as the general rule in
the code, including this article, is that the effect of the code's provisions
may be varied by agreement. Section 1-102(3). This conclusion follows even
where the statutory analogue contains the phrase and the correlative provision
in article 2A does not.