Default by Lessors

Commercial Code Division 10, Chapter 5, Article 2 deals with defaults by lessors involving personal property leases. Section 10508 provides, if a lessor fails to deliver the goods in conformity to the lease contract or repudiates the lease contract, or a lessee rightfully rejects the goods or justifiably revokes acceptance of the goods, then with respect to any goods involved, and with respect to all of the goods if under an installment lease contract the value of the whole lease contract is substantially impaired, the lessor is in default under the lease contract and the lessee may take one of four specified actions.

If a lessor fails to deliver the goods in conformity to the lease contract or repudiates the lease contract, the lessee may also take one of two specified actions. If a lessor is otherwise in default under a lease contract, the lessee may exercise the rights and pursue the remedies provided in the lease contract, which may include a right to cancel the lease. If a lessor has breached a warranty, whether express or implied, the lessee may recover damages.

On rightful rejection or justifiable revocation of acceptance, a lessee has a security interest in goods in the lessee’s possession or control for any rent and security that has been paid and any expenses reasonably incurred in their inspection, receipt, transportation, and care and custody, and may hold those goods and dispose of them in good faith and in a commercially reasonable manner.

Section 10509 specifies, if the goods or the tender or delivery fail in any respect to conform to the lease contract, the lessee may reject or accept the goods or accept any commercial unit or units and reject the rest of the goods. Also, rejection of goods is ineffective unless it is within a reasonable time after tender or delivery of the goods and the lessee seasonably notifies the lessor.

Section 10510 allows a lessee to reject any delivery that is nonconforming if the nonconformity substantially impairs the value of that delivery and cannot be cured or the nonconformity is a defect in the required documents.

Section 10511 says, subject to any security interest of a lessee, if a lessor or a supplier has no agent or place of business at the market of rejection, a merchant lessee, after rejection of goods in his or her possession or control, is required to follow any reasonable instructions received from the lessor or the supplier with respect to the goods.

If a merchant lessee or any other lessee disposes of goods, he or she is entitled to reimbursement either from the lessor or the supplier or out of the proceeds for reasonable expenses of caring for and disposing of the goods and, if the expenses include no disposition commission, to such commission as is usual in the trade, or if there is none, to a reasonable sum not exceeding 10% of the gross proceeds.

Section 10512 requires the lessee, after rejection of goods in the lessee’s possession, to hold them with reasonable care at the lessor’s or the supplier’s disposition for a reasonable time after the lessee’s seasonable notification of rejection. Also, action by the lessee is not acceptance or conversion.

Section 10513 states, if any tender or delivery by the lessor or the supplier is rejected because it is nonconforming and the time for performance has not yet expired, the lessor or the supplier may seasonably notify the lessee of the lessor’s or the supplier’s intention to cure and may then make a conforming delivery within the time provided in the lease contract.

Section 10514 states, in rejecting goods, a lessee’s failure to state a particular defect that is ascertainable by reasonable inspection precludes the lessee from relying on the defect to justify rejection or to establish default in two specified circumstances. A lessee’s failure to reserve rights when paying rent or other consideration against documents precludes recovery of the payment for defects apparent in the documents.

Section 10515 provides acceptance of goods occurs after the lessee has had a reasonable opportunity to inspect the goods and the lessee does either of two specified acts. Acceptance of a part of any commercial unit is acceptance of that entire unit.

Section 10516 requires a lessee to pay rent for any goods accepted in accordance with the lease contract, with due allowance for goods rightfully rejected or not delivered. A lessee’s acceptance of goods precludes rejection of the goods accepted. If a tender has been accepted, three specified requirements must be met. In addition, if a lessee is sued for breach of a warranty or other obligation for which a lessor or a supplier is answerable, then two specified rules apply.

Section 10517 allows a lessee to revoke acceptance of a lot or commercial unit whose nonconformity substantially impairs its value to the lessee if the lessee has accepted it with two specified exceptions. A lessee may revoke acceptance of a lot or commercial unit if the lessor defaults under the lease contract and the default substantially impairs the value of that lot or commercial unit to the lessee.

In addition, the lessee may revoke acceptance of a lot or commercial unit because of other defaults by the lessor. Revocation of acceptance must occur within a reasonable time after the lessee discovers or should have discovered the ground for it and before any substantial change in condition of the goods which is not caused by the nonconformity. Revocation is not effective until the lessee notifies the lessor.

Section 10518 states, after a default by a lessor under the lease contract or, if agreed, after other default by the lessor, the lessee may cover by making any purchase or lease of or contract to purchase or lease goods in substitution for those due from the lessor. If a lessee’s cover is by a lease agreement substantially similar to the original lease agreement and the new lease agreement is made in good faith and in a commercially reasonable manner, the lessee may recover from the lessor as damages for specified items.

Section 10519 states, if a lessee elects not to cover or a lessee elects to cover and the cover is by lease agreement that for any reason does not qualify for treatment, or is by purchase or otherwise, the measure of damages for non-delivery or repudiation by the lessor or for rejection or revocation of acceptance by the lessee is the present value, as of the date of the default, of the then market rent minus the present value as of the same date of the original rent, computed for the remaining lease term of the original lease agreement, together with incidental and consequential damages, less expenses saved in consequence of the lessor’s default.

Market rent is to be determined as of the place for tender or, in cases of rejection after arrival or revocation of acceptance, as of the place of arrival. Also, if the lessee has accepted goods and given notification, the measure of damages for nonconforming tender or delivery or other default by a lessor is the loss resulting in the ordinary course of events from the lessor’s default as determined in any manner that is reasonable together with incidental and consequential damages, less expenses saved in consequence of the lessor’s default.

Section 10520 states incidental damages resulting from a lessor’s default include expenses reasonably incurred in inspection, receipt, transportation, and care and custody of goods rightfully rejected or goods the acceptance of which is justifiably revoked, any commercially reasonable charges, expenses, or commissions in connection with effecting cover, and any other reasonable expense incident to the default. In addition, consequential damages resulting from a lessor’s default include two specified circumstances.

Section 10521 specifies specific performance may be decreed if the goods are unique or in other proper circumstances. A decree for specific performance may include any terms and conditions as to payment of the rent, damages, or other relief that the court deems just.

Section 10522 states, even though the goods have not been shipped, a lessee who has paid a part or all of the rent and security for goods identified to a lease contract on making and keeping good a tender of any unpaid portion of the rent and security due under the lease contract may recover the goods identified from the lessor if the lessor becomes insolvent within 10 days after receipt of the first installment of rent and security. A lessee acquires the right to recover goods identified to a lease contract only if they conform to the lease contract.