Businesses who are in need of equipment, whether it be heavy, light or even computer equipment, often seek to obtain such equipment through a lease arrangement where the vendor of the equipment sells the equipment to a lease finance company who then leases the equipment to the business. This arrangement commonly known as a finance lease provides businesses with the means to obtain needed equipment without an initial outlay of capital.
Finance leases frequently contain what has come to be known as a “hell or high water” rent obligation. The obligation requires the lessee to pay unconditionally the full rent when due even if the lessee has a legitimate claim concerning the functionality or operation of the equipment. The lease finance industry has come to rely on the clear enforceability of such provisions as an incentive for such lessors to enter and remain in the equipment lease finance market. And as a practical matter it provides finance lessors with meaningful security for the expectation to be paid rent under the lease rather than having solely to rely on equipment repossession which will ultimately return to the finance lessor equipment with a significantly reduced value.
New York has adopted Article 2A of the Uniform Commercial Code which sets forth the obligations of lessors and lessees in the equipment lease context. For the purpose of this blog post, we will assume the subject lease meets the definition of a lease under Article 2A and that the lessee is a merchant, and not a consumer. In order for an equipment lessor to garner the benefits of a hell or high water provision, the subject lease must first be a non-consumer finance lease. There are numerous conditions which must exist in order to meet the definition of a finance lease under 2A §2-A-103 (g). Some of the conditions are that the equipment lessor must not have not selected, manufactured or supplied the equipment; the lessee must have acquired the subject equipment from the vendor; and the lessee must have had possession of the lease documents before signing, and made aware of the warranties and representations of the vendor and that the lessee has the right to pursue the vendor for any warranty claims.
Alternatively, the parties to a non-consumer equipment lease can achieve the same result as that contemplated by a finance lease by virtue of the terms and conditions of the Lease. General Electric Capital Corporation v. National Tractor Trailer School, Inc., 175 Misc.2d 20, 667 N.Y.S.2d 614, 619 (S. Ct. Onondaga Co. 1997). Examples of key provisions are that the lessee’s obligation to pay the lease payments is a primary obligation which must be honored by the lessee regardless of any claims the lessee may have with regard to the adequacy and proper functioning of the subject equipment; and the lessee’s waiver of UCC §§ 2-A-508-522, which relate to the lessee’s remedies upon default by the lessor, including the right to cancel the lease contract as a result of a rightful rejection of the subject equipment.
As to the irrevocable nature of the lessee’s obligation to pay the lease payments due and owing under the Lease (the hell or high water provision), UCC § 2-A-407. Irrevocable Promises; Finance Leases, provides as follows:
(1) 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.
(2) A promise that has become irrevocable and independent under Subsection (1):
(a) is effective and enforceable between the parties, and by or against third parties including assignees of the parties; and
(b) is not subject to cancellation, termination, modification, repudiation, excuse, or substitution without the consent of the party to whom the promise runs.
Hell or high water provisions have been enforced by New York courts. National City Commercial Capital Co., LLC v. Becker Real Estate Services, Inc., 24 Misc. 3d 912, 885 N.Y.S.2d 173 (Sup. Ct. Suffolk Co. 2009).
In business, certainty of result and remedy is a precious thing. The hell or high water provision of a non-consumer finance lease provides such certainty, a clear benefit for the lessors and lessees who make up the equipment leasing industry.