LEASING LAW By Michael P. Gallo and Tony R. Sears Thinking Outside the Box T An Equipment Manufacturer Can Enter Into a Finance Lease and Create a “Hell or High Water” Lease Obligation RADITIONALLY, a three-party, multiple-agreement transaction was required to establish a “finance lease” in which a lessee is obligated to make all lease payments irrespective of the equipment’s performance; that is, come “hell or high water.” Manufacturers and suppliers may now be able to achieve the same result directly, by expressly incorporating the necessary terms in a two-party equipment lease. In other words, a finance lease lessee must comply with its payment obligations come “hell or high water.” This is not to say that the lessee is entirely without a remedy. In addition to any potential remedies provided in the finance lease itself, the Official Comment to Section 407 explains that the lessee might still have a cause of action based on the supplier’s warranties. One traditional rationale for enforcing such “hell or high water” clauses is that doing so provides a solid foundation upon which finance lease lessors can rely, facilitating their infusion of capital into the commercial equipment lease industry. However, equipment suppliers have exploited the significant benefits of the “hell or high water” obligations resulting from an Article 2-A Finance Lease by creating captive finance companies to enter into finance leases with lessees. Courts traditionally have enforced the absolute and unconditional payment obligations imposed under finance leases in these scenarios, even where the supplier and fi-nance lease lessor are closely related entities, such as parent or sister companies. What Is an Article 2-A Finance Lease? The term “finance lease” is used in many contexts in the com-mercial equipment lease industry, including as a generic ref-erence to a fully amortized or “capital” lease. Here, however, we address the legal definition of a finance lease, as set forth in Article 2-A of the Uniform Commercial Code (UCC). Section 103(1)(g) of Article 2-A sets forth the following requisite elements of a finance lease: (1) The lessor does not select, manufacture or supply the goods; (2) The lessor acquires the goods or the right to possession and use of the goods in connection with the lease; and (3) The “supply contract,” or its essential terms, are ad-equately disclosed to the finance lessee. Thus, in its traditional sense, an Article 2-A Finance Lease is part of a transaction that involves at least three parties (sup-plier, lessor and lessee) and at least two agreements (a supply contract, such as a purchase order, between the supplier and fi-nance lessor, and a finance lease between the lessor and lessee). Significance of an Article 2-A Finance Lease Having a lease classified as an Article 2-A Finance Lease carries significant consequences. Section 407 of Article 2-A provides that (except in consumer leases) the lessee’s obliga-tions under a finance lease “become irrevocable and inde-pendent upon the lessee’s acceptance of the goods.” The les-see’s obligations are “not subject to cancellation, termination, modification, repudiation, excuse or substitution.” As Official Comment 2 to Section 407 explains, this “requires the lessee to perform even if the lessor’s performance after the lessee’s acceptance is not in accordance with the lease contract.” Manufacturers Can Directly Impose “Hell or High Water” Obligations on Lessees Because a two-party transaction cannot, by definition, sat-isfy the elements of a finance lease, many in the commercial equipment lease industry continue to assume that a manu-facturer cannot possibly enter a finance lease or directly im-pose “hell or high water” obligations on equipment lessees. However, this assumption is not entirely accurate. A two-party finance lease imposing “hell or high water” obligations is supported by— (Continued on page 51) SHUTTERSTOCK/ ROB HYRONS 48 In other words, a finance lease lessee must comply with its payment obligations come “hell or high water.”