A lease is a form of rental agreement that allows a party to use equipment for the duration of the agreement in exchange for monthly payments. The lessor owns the equipment and allows the lessee to use and operate it for the term of the lease.
Leases can come in many forms and shapes. The rights and remedies available to a lessor will vary on whether a court deems the agreement a “true lease” or a “lease intended as security.” True leases are governed by Article 2A of the Uniform Commercial Code (the “UCC”) which has been adopted by a vast majority of the states. Leases intended as security are only disguised security agreements and are governed by Article 9 of the UCC.
Generally, courts look at the provisions in the agreement to establish whether it is a true lease or a security agreement. Key conditions for finding a security agreement are that (i) the lessee does not have the right to terminate the lease prior to the end of its term, and (ii) the presence of any of the following factors: (a) the original term of the lease is equal to or greater than the economic life of the leased equipment; (b) the lessee is required to renew the lease for the remaining economic life of the equipment or is required to become the owner of the equipment; (c) the lessee has an option to renew the lease for the remaining economic life of the equipment for no additional consideration or nominal additional consideration upon compliance with the lease agreement, and (d) the lessee has an option to become the owner of the equipment for no additional consideration or nominal additional consideration.
The remedies under a true lease include: cancellation of the lease; payment of accrued but unpaid obligations and of the present value of future obligations; repossessing the equipment without judicial process so long as this can be accomplished without a breach of the peace; and disposing of the equipment through a sale, lease or other means.
One of the principal difference in the damages that are available to a lessor under a lease intended as security is that the lessor is only entitled to recover principal and accrued and unpaid interest (but not the present value of the unaccrued amounts under the lease).
Other important distinctions in the treatment of true leases and leases intended as security agreements arise in the context of bankruptcy cases. True leases may receive more beneficial treatment than leases intended as security under the Bankruptcy Code. For instance, a true lease that is terminated before a bankruptcy filing does not become property of the bankruptcy estate and cannot be revived during the bankruptcy case. True leases must be either assume or rejected and their obligations must be performed until such choice is made. A lease intended as security may only receive adequate protection payments, which measures the diminution in value of the equipment (i.e., its depreciation) during the bankruptcy case.
Our attorneys have litigated lease disputes in New York, New Jersey, Delaware, Texas, and Michigan. Their experience in bankruptcy court and other fora will help you understand and navigate these and other issues that frequently arise in the context of lease disputes. Our offices are conveniently situated for cases filed in Manhattan federal and state courts, Brooklyn federal and state courts, and Northern New Jersey (Bergen and Essex County).