Sales and Leases | 54
1. Applicability of Article 2A to True Leases UCC Article 2A applies to “any transaction, regardless of form, that creates a lease.” [U.C.C. § 2A-102 (1990).] A lease, in turn, is the transfer of the right to possess and use goods for a limited time, in exchange for consideration. A sale is not a lease, nor is the creation or retention of a security interest. Unless the context clearly indicates to the contrary, the term lease also includes a sublease. Oftentimes, parties will label their transaction a lease, but upon closer scrutiny, it becomes apparent that the transaction is really a sale, perhaps with reservation of a security interest. In this case, it is the substance, not the label, that governs. Thus, if a transaction styled a lease is really a sale, then Article 2A will not apply. Instead, Article 2 will apply, and insofar as the transaction creates or reserves a security interest, Article 9 will apply. [U.C.C. § 2A-103(1)(j) (1990).] 2. Distinguishing between True Leases and Disguised Sales on Credit with Reservation of a Security Interest The UCC articulates rules to distinguish between a true lease and a disguised sale with reservation of a security interest. Subject to additional rules, a transaction labeled a lease is really a sale with reservation of a security interest if the consideration owing from the lessee to the lessor for the goods’ use and possession persists for the term of the lease, the lessee cannot terminate it, and one of the following four elements is satisfied: the lease’s original term equals or exceeds the goods’ remaining economic life; the lessee is bound to either renew the lease for the goods’ remaining economic life or to become the goods’ owner; the lessee may, for no or nominal additional consideration, renew the lease for the goods’ remaining economic life upon complying with the lease agreement; or the lessee may, for no or nominal additional consideration, become the goods’ owner upon complying with the lease agreement.
[U.C.C. § 1-203(b) (2001).]
II. Contract Formation and Modification under Article 2 In virtually any breach-of-contract case, including one involving a contract for the sale of goods, contract formation is a pivotal issue. Contract formation, of course, involves whether an enforceable contract ever existed in the first place. If not, then there was never anything to breach. In Article 2, the basic rules on formation are much the same as under the common law of contracts, in that formation usually requires an offer, acceptance, and consideration. Even so, Article 2 displaces and alters the common law in many important respects, including concerning the statute of frauds, the parol-evidence rule, the extent to which an acceptance must mirror the offer, and contract
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