Defaults under the Commercial Code

California’s Commercial Code, in Division 10, Chapter 5, Article 1, deals with defaults generally under personal property leases. Section 10501 states that whether the lessor or the lessee is in default under a lease contract is determined by the lease agreement and this division. Also, the party seeking enforcement has rights and remedies as provided in this division and, except as limited by this division, as provided in the lease agreement.

The party seeking enforcement may reduce the party’s claim to judgment, or otherwise enforce the lease contract by self-help or any available judicial procedure or nonjudicial procedure, including administrative proceeding, arbitration, or the like, in accordance with this division. If the lease agreement covers both real property and goods, the party seeking enforcement may proceed under this chapter as to the goods.

Section 10502 specifies the lessor or lessee in default under the lease contract is not entitled to notice of default or notice of enforcement from the other party to the lease agreement.

Section 10503 allows the lease agreement to include rights and remedies for default in addition to or in substitution for those provided in this division and may limit or alter the measure of damages recoverable under this division. Resort to a remedy provided under this division or in the lease agreement is optional unless the remedy is expressly agreed to be exclusive.

Consequential damages may be liquidated, or may otherwise be limited, altered, or excluded unless the limitation, alteration, or exclusion is unconscionable. Limitation, alteration, or exclusion of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation, alteration, or exclusion of damages where the loss is commercial is not prima facie unconscionable.

Section 10504 provides damages payable by either party for default, or any other act or omission, including indemnity for loss or diminution of anticipated tax benefits or loss or damage to the lessor’s residual interest, may be liquidated in the lease agreement subject to and in compliance with the Civil Code.

If the lease agreement provides for liquidation of damages, a remedy may be had as provided in this division. If the lessor justifiably withholds or stops delivery of goods because of the lessee’s default or insolvency, the lessee is entitled to restitution of any amount by which the sum of his or her payments exceeds specified amounts. A lessee’s right to restitution is subject to offset to the extent the lessor establishes specified conditions.

Section 10505 provides on cancellation of the lease contract, all obligations that are still executory on both sides are discharged, but any right based on prior default or performance survives, and the canceling party also retains any remedy for default of the whole lease contract or any unperformed balance. On termination of the lease contract, all obligations that are still executory on both sides are discharged but any right based on prior default or performance survives.

Section 10506 specifies that an action for default under a lease contract, including breach of warranty or indemnity, must be commenced within four years after the cause of action accrued. In a lease contract that is not a consumer lease, by the original lease contract the parties may reduce the period of limitation to not less than one year.

A cause of action for default accrues when the act or omission on which the default or breach of warranty is based is or should have been discovered by the aggrieved party, or when the default occurs, whichever is later. A cause of action for indemnity accrues when the act or omission on which the claim for indemnity is based is or should have been discovered by the indemnified party, whichever is later.

Section 10507 states damages based on market rent are determined according to the rent for the use of the goods concerned for a lease term identical to the remaining lease term of the original lease agreement and prevailing at the times specified. If evidence of rent for the use of the goods concerned for a lease term identical to the remaining lease term of the original lease agreement and prevailing at the times or places described in this division is not readily available, the rent prevailing within any reasonable time before or after the time described or at any other place or for a different lease term which in commercial judgment or under usage of trade would serve as a reasonable substitute for the one described may be used, making any proper allowance for the difference, including the cost of transporting the goods to or from the other place.