CLFP Chapter 3 - Leasing Law

Requirements for an enforceable contract (4)

1. Offer and Acceptance 2. Capacity 3. Legality 4. Statue of Frauds

Residual Value - Lease Intended as Security

A LENDER/LESSOR looks ONLY to the INTEREST (or interest factor in the "rent") during the TERM

Residual Value - True Lease

A LESSOR in a lease EXPECTS PROFIT from the combination of a portion of RENTS and RESIDUAL VALUE

Bankruptcy

A LESSOR under a True Lease has better rights to recover the equipment in the event of a Lessee default because the Lessor is the owner of the equipment

Who has WARRANTY rights for a Finance Lease?

ALL WARRANTIES provided by the supplier are AUTOMATICALLY deemed assigned to the LESSEE

Collateral - Secured Loans (Leases intended as Security)

APPROPRIATE to REFER to leased equipment as COLLATERAL

LEGAL definition of what is NOT a lease under UCC

Agreement is NOT subject to TERMINATION AND 1. Term EQUALS or EXCEEDS economic life OR 2. Lessee is REQUIRED to BUY equipment for NOMINAL amount or AUTOMATICALLY owns equipment OR 3. Lessee is REQUIRED to RENEW agreement or has option to renew for nominal amount, if renewal will cause agreement to EQUAL or EXCEED the ECONOMIC LIFE of the equipment

Interest/Usury - Secured Loans (Leases intended as Security)

Because INTEREST is charged, payments may be SUBJECT to STATE USURY LIMITATIONS

Who is responsible for COLLATERAL MAINTENANCE for Secured Loans (Leases intended as Security)?

Borrower

Bankruptcy - Secured Loan (Lease intended as Security)

Borrower may force a "CRAMDOWN" in which the REORGANIZATION PLAN will limit the lender's recovery to the FMV or the collateral - not the agreed upon repayment

Regulatory Law

Consists of REGULATIONS ADOPTED by public bodies (ex. IRS, SEC)

Statue of Frauds

Contracts must be memorialized IN WRITING under Article 2A-201, a lease contract in excess of $1,000 is unenforceable unless in writing

UCC Article 2

Deals EXCLUSIVELY with the SALES OF GOODS (tangible personal property)

UCC Article 9

Deals exclusively with the creation of SECURITY INTERESTS in personal property *ONLY for SECURED TRANSACTIONS or SECURED FINANCING, including loans secured by goods as collateral and leases intended as security

Borrower

Debtor

Capacity

Each of the parties is LEGALLY ABLE to enter into contract

PMSI Fixture Financing Statements

Equipment AFFIXED to REAL ESTATE, must be filed in the LOCAL COUNTY real estate records

What lease are there NO UCC filing requirements for?

Finance Lease

What CLAUSE is AUTOMATIC in a Finance Lease

Hell or High Water Clause - LESSEE MUST make rental payments for equipment irrespective of any claim it may have against the Lessor and without set off

Collateral - True Lease

INAPPROPRIATE to REFER to leased equipment as COLLATERAL

Legal Lease Summary

If the LESSEE has ALL the BENEFITS and RISKS of OWNERSHIP and the LESSOR has NO realistic RESIDUAL VALUE, RISK or BENEFIT, the TRANSACTION IS A LOAN for all practical and economic purposes

Rent Factor

Implicit interest factor

PMSI's must be FILED where?

In the STATE where the Lessee is INCORPORATED

Statutory Law

Includes law enacted by LEGISLATIVE BODIES such as STATE LEGISLATURES and US CONGRESS

State Law

Includes laws adopted by INDIVIDUAL STATE LEGISLATURES (UCC, sales tax, property taxes in each state)

Federal Law

Includes laws adopted by US CONGRESS Internal Revenue Code Bankruptcy Code

Contract Law

Includes laws regarding a VOLUNTARY ARRANGEMENT between 2 or more parties (contract) Generally a matter of STATE law but CASE law is also important

True Leases DO NOT charge

Interest

Does the LENDER have MORE or LESS exposure and LIABILITY in a "LEASE INTENDED AS SECURITY"

LENDER has less EXPOSURE for LIABILITY to 3rd parties caused by FAULTY or IMPROPERLY maintained equipment

UCC rights for Lease Intended as Security

LENDER/LESSOR has SECURITY INTEREST in the equipment Governed by UCC Article 9

UCC rights for TRUE LEASE

LESSOR OWNS the equipment Governed by UCC Article 2A

Why does the LESSOR have MORE exposure and LIABILITY in a "TRUE LEASE"

LESSOR has more EXPOSURE for LIABILITY to 3rd parties caused by FAULTY or IMPROPERLY maintained equipment

COURTS tend to FOCUS primarily on

LESSOR's RESIDUAL position, when determining whether a transaction is a LEASE OR a SECURED LOAN creating a security interest

If the LESSEE has ALL the BENEFITS and RISKS of OWNERSHIP

LOAN for Lessee, NOT a Lease (LEGAL definition)

If the LESSOR has NO realistic RESIDUAL VALUE, RISK or BENEFIT

LOAN for Lessor, NOT a Lease (LEGAL definition)

Secured Loans

Leases intended as Security

Article 9 Lender and Borrower TERMS

Lender - "SECURED PARTY" Borrower - "DEBTOR"

Perfecting Security Interests - Lease Intended as Security

Lender SHOULD file UCC-1 financing statement for secured loan Motor vehicle financing REQUIRE NOTATIONS on certificates of TITLE

Bankruptcy Lessor and Lessee are NOT PERMITTED

Lender and Lessor not PERMITTED to ignore bankruptcy altogether and RECOVER equipment or SUE for damages

Who is responsible for COLLATERAL MAINTENANCE for True Lease?

Lessee

Perfecting Security Interests - True Lease

Lessor NOT required to file UCC-1 financing statement for true lease Motor vehicles, aircraft, and other TITLED EQUIPMENT LEASES require that the LESSOR be shown as the OWNER on the TITLES and similar documentation

Choice of Law Provision

Lessor can include in their documents the law which will be applied in any dispute regarding the lease

UCC Article 2 - Implied warranties

Lessor deemed to WARRANT that the goods they sell are MERCHANTABLE (for ordinary purposes and in GOOD CONDITION), fit for the PARTICULAR USE that the Lessee/Buyer contemplates

Bankruptcy - True Lease

Lessor has BETTER rights to RECOVER equipment* Lessee CANNOT pursue CRAMDOWN

Who has RESPONSIBILITY if equipment malfunctions in a FINANCE LEASE?

Lessor is ABSOLVED of ANY RESPONSIBILITY with respect to equipment MALFUNCTION or FAILURE to meet the Lessee's EXPECTATIONS

Offer and Acceptance

MUTUAL agreement on principal terms and considerations, or something of value, GIVEN or PROMISED by each party

Does UCC Article 9 cover ALL types of CLAIMS and equipment?

NO (example: aircraft, vessels)

Are FINANCING STATEMENTS used to PERFECT INTERESTS in MOTOR vehicles and other properties covered by CERTIFICATE of TITLE?

NO, not UNLESS items are held as INVENTORY

Case Law

Often referred to as COMMON LAW Cases that apply/interpret statutory law or PRIOR case law PRECEDENTS to particular sets of facts

UCC Article 9 PMSI

Purchase Money Security Interest is given a GRACE PERIOD of 20 DAYS under state law to file a standard financing statement

Article 9 - Secured Interest

Refers to the INTEREST GRANTED to the lender/lessor and is similar to a LIEN or other ENCUMBRANCE

Interest - True Lease

Rent includes INTEREST FACTOR rather than charging separate interest amount Lessee PAYS ALL or a significant portion of the equipment to Lessor TOGETHER with an IMPLICIT INTEREST FACTOR or "RENT FACTOR"

Lender

Secured Party

If Lessee has benefits & burdens of ownership

Secured loan/Financing

Legal evaluation criteria

TERM length compared to economic life of equipment lessee's responsibility to PAY TAXES related to equipment WHO has the benefits and burdens of OWNERSHIP

DIFFERENT RULES exist for the definition of a "lease" between LEGAL, FEDERAL income tax, and ACCOUNTING standards

TRUE

UCC Article 9 NOT applicable for..

TRUE leases

Article 2A deals ONLY with what type of Leases?

TRUE leases, aka finance leases

If Lessor has benefits & burdens of ownership

True Lease

Legality

Used to PROHIBIT ENFORCEMENTS of SECURED FINANCING that exceed the legal usury (rate) limit and PROHIBIT leases of equipment used in ILLEGAL activities (gambling)

Usury - True Lease

Usury laws DO NOT APPLY in MOST STATES

Article 2A - 3 Characteristics of a FINANCE lease

a TRUE lease where 1. Lessor is NOT MANUFACTURER or VENDOR (supplier) of leased personal property 2. Lessor DOES NOT SELECT the equipment or lease it from an INVENTORY of LIKE ITEMS 3. Lessor makes sure LESSEE is APPRISED of its RIGHTS AGAINST the SUPPLIER with respect to warranties

Article 2A - A FINANCE lease is

a TRUE lease with 3 characteristics

Uniform Commercial Code "UCC"

a body of STATE STATUTORY law

A secured loan which is structured as a lease, the "rent" is actually

principal & interest expressed as a single payment

Conflicts of Law

refers to INCONSISTENCIES in laws between STATES ("choice of law" provision)