Performance of Leased Contracts

Commercial Code Division 10, Chapter 4 deals with the performance of leased contracts, including those repudiated, substituted, and excused for purposes of personal property leases.

Section 10401 states that a lease contract imposes an obligation on each party that the other’s expectation of receiving due performance will not be impaired. If reasonable grounds for insecurity arise with respect to the performance of either party, the insecure party may demand in writing adequate assurance of due performance.

Until the insecure party receives that assurance, if commercially reasonable, the insecure party may suspend any performance for which he or she has not already received the agreed return. A repudiation of the lease contract occurs if assurance of due performance adequate under the circumstances of the particular case is not provided to the insecure party within a reasonable time, not to exceed 30 days after receipt of a demand by the other party.

Section 10402 says that, if either party repudiates a lease contract, other than a consumer lease, with respect to a performance not yet due under the lease contract, the loss of which performance will substantially impair the value of the lease contract to the other, the aggrieved party may one of three specified actions. The rights and remedies of the parties to a consumer lease in connection with a repudiation of that lease is determined under other laws.

Section 10403 provides that, until the repudiating party’s next performance is due, the repudiating party can retract the repudiation unless, since the repudiation, the aggrieved party has canceled the lease contract or materially changed the aggrieved party’s position or otherwise indicated that the aggrieved party considers the repudiation final.

Retraction may be by any method that clearly indicates to the aggrieved party that the repudiating party intends to perform under the lease contract and includes any assurance demanded. Retraction reinstates a repudiating party’s rights under a lease contract with due excuse and allowance to the aggrieved party for any delay occasioned by the repudiation.

Section 10404 states that, if without fault of the lessee, the lessor, and the supplier, the agreed berthing, loading, or unloading facilities fail or the agreed type of carrier becomes unavailable or the agreed manner of delivery otherwise becomes commercially impracticable, but a commercially reasonable substitute is available, the substitute performance must be tendered and accepted. However, if the agreed means or manner of payment fails because of domestic or foreign governmental regulation, then two specified conditions can apply.

Section 10405 provides that three specified rules apply on substituted performance.

Section 10406 states that, if the lessee receives notification of a material or indefinite delay or an allocation, the lessee may by written notification to the lessor as 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, then either of two specified actions can be taken. If, after receipt of a notification from the lessor, the lessee fails to modify the lease agreement within a reasonable time not exceeding 30 days, the lease contract lapses with respect to any deliveries affected.

Section 10407 provides that, in the case of a finance lease that is not a consumer lease, the lessee’s promises under the lease contract become irrevocable and independent upon the lessee’s acceptance of the goods. A promise that has become irrevocable and independent is effective and enforceable between the parties, and is not subject to cancellation, termination, modification, repudiation, excuse, or substitution without the consent of the party to whom the promise runs.