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DRAFT

FOR DISCUSSION ONLY

UNIFORM CONSUMER LEASES ACT

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

APRIL 1998

UNIFORM CONSUMER LEASES ACT

With Comments

COPYRIGHT© 1998

BY

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

ROBERT H. CORNELL, 350 Cambridge Avenue, Suite 100, Palo Alto, CA 94036, Co-Chair

JUSTIN L. VIGDOR, 2400 Chase Square, Rochester, NY 14604, Co-Chair

PAMELA G. CHIN, 35th Floor, 444 South Flower Street, Los Angeles, CA 90071

JACK DAVIES, Court of Appeals, Judicial Building, 25 Constitution Avenue, St. Paul, MN 55155

PATRICK C. GUILLOT, Suite 900, 8080 North Central Expressway, Dallas, TX 75206

NEAL OSSEN, Suite 201, 21 Oak Street, Hartford, CT 06106

RAYMOND P. PEPE, 13th Floor, 240 North Third Street, Harrisburg, PA 17101-1507

MARK H. RAMSEY, Room 309, State Capitol Building, Oklahoma City, OK 73105

RICHARD B. SMITH, 450 Lexington Avenue, New York, NY 10017

WILLIS E. SULLIVAN, III, P.O. Box 359, 1423 Tyrell Lane, Boise, ID 83701

RALPH J. ROHNER, Columbus School of Law, The Catholic University of America, Cardinal Station, Washington, DC 20064, Reporter

GENE N. LEBRUN, P.O. Box 8250, 9th Floor, 909 St. Joseph Street, Rapid City, SD 57709, President

DAVID D. BIKLEN, Law Revision Commission, Room 509A, State Capitol, Hartford, CT 06106, Division Chair

AMERICAN BAR ASSOCIATION ADVISOR

KIMBERLY A. TAYLOR, 1200 Hillside Avenue, Chesapeake, VA 23322

FRED H. MILLER, University of Oklahoma, College of Law, 300 Timberdell Road, Norman, OK 73019, Executive Director

WILLIAM J. PIERCE, 1505 Roxbury Road, Ann Arbor, MI 48104, Executive Director Emeritus

Draft # 5 April 1998

Sec. # Caption Page # Dr.4 §

101 Short Title; Scope 3 101

102 General Definitions 3 102

103 Exclusions; Sale Incident to Lease 9 110, 106

104 Transaction Subject to Act by 12 105

Agreement

105 Supplementary General Principles 12 103

of Law Applicable

106 Waiver; Agreement to Forego Rights; 13 104

Settlement of Claim

107 Territorial Application; Limitation 14 109

on Applicable Law and Forum

108 Obligation of Good Faith 16 107

109 Unconscionability 16 108

201 Lease Advertising 17 201

202 Pre-Lease Availability of Sample Form 18 202

203 Rebate or Discount for Referrals 19 205

204 Payment or Trade-in Pending Execution 20 303

of Lease; Refund or Return

205 Disclosure; Form of Lease Document 22 203

206 Cosigner Notice 23 204

207 Information During Lease Term 24 306

208 Renegotiation or Extension 25 307

209 Satisfaction of Lease 26 308

210 Prohibited Lease Terms 26 206

211 Security Interest Restricted; Security Deposit 27 207, 208

212 Delinquency, Default and Collection 28 311

Charges; Attorney's Fees

213 Assignment of Lease; Preservation of 30 313

Lessee's Claims and Defenses

214 Sublease 32 314

215 Warranties of Quality and Title 33 209

301 Coverage of this Part 34 301

302 Definitions for Motor Vehicle Leases 34 302

303 Disclosure; Content and Form of Lease 41 305

304 Insurance 42 310

305 Liability for Gap Amount 47 312

306 Lessee's Default; Right to Cure 49 315

307 Repossession; Reinstatement 51 316

308 Determining Realized Value 54 318-A

309 Manner of Disposition of Vehicle on 55 318-B

Termination of Lease

310 Early Termination Liability 57 319

311 Excess Wear and Use; Excess Mileage 62 320

312 Open-End Lease 65 321

313 Calculation of Lease Rate 66 322

[Reserved] 68

501 Private Remedies 69 501

502 Effect of Violation on Rights of 74 503

Parties

503 Administrative Enforcement 74 504

504 Administration of Act 75 505

601 Purposes; Rules of Construction 76

602 Construction Against Implicit Repeal 77

603 Severability 77

604 Effective Date; Transition 77

605 Specific Repealer and Amendments 78

Section 101. Short Title; Scope

(a) This Act shall be known and may be cited as the Uniform Consumer Leases Act.

(b) Subject to Section 103, this Act applies to a transaction that is a consumer lease [as defined in Section 102(3)].

Reporter's Notes: As a matter of Conference style, subsection (b) may not be needed at all.

Proposed Comments:

1. Subsection (b) states the overall scope of this Act. It applies to consumer leases as defined in Section 102, subject to the exclusions in Section 103. As the context of various provisions makes clear, this Act also applies to pre-transaction conduct such as advertising and other inducements.

2. While this Act provides an array of restrictions and authorizations concerning consumer leases, it is not comprehensive or exclusive coverage of those transactions. It is meant to harmonize with the federal Consumer Leasing Act and to complement UCC Article 2A [Leases]

Section 102. General Definitions.

(a) As used in this Act:

(1) "Conspicuous" means distinguished from other terms by type-size or in some other manner. A term in at least 10-point bold type is conspicuous.

Reporter's Notes: Is this adequate for electronic as well as written documents? Is the safe-harbor of 10-point bold type appropriate? That's only this big.

(2) "Consummation" means the time when a lessee becomes contractually obligated on a lease transaction.

Reporter's Notes: From the Reg. M Commentary. In the federal regulation, this ultimately depends on the state law of contract formation. Since this Act is state law, do we need an unequivocal bright-line test? Perhaps "when the lessee signs a record which constitutes a commitment to the lease"?

(3) "Consumer lease" means a contract for the transfer of the right to possession and use of goods in return for consideration, between a lessor and a lessee who is -

(A) obligated for a term exceeding four months and for a total contractual obligation not exceeding $150,000 (excluding the residual value, any payments for options to renew or purchase, and payments to third parties), whether or not the lessee has the option to purchase or otherwise become the owner of the property at the expiration of the lease; and

(B) a natural person who takes under the lease primarily for personal, family, or household purposes.

Reporter's Notes: Rewritten as of 6/97 to tighten language and reflect earlier Drafting Committee discussions. The earlier Options are collapsed together into a single version that combines the essential features of a consumer lease from UCC Art. 2A and from Reg. M. The preamble portion is verbatim from UCC Art. 2A.

(4) "Federal Consumer Leasing Act" means Chapter 5 of Title I of the Consumer Credit Protection Act, 15 U.S.C.A. § 1667, [and includes regulations and interpretations issued from time to time by the Board of Governors of the Federal Reserve System pursuant to that Act (Regulation M, 12 C.F.R. Part 213).]

Reporter's Notes: Patterned on UCCC § 1.302, but citing specifically to the federal leasing statute and Reg. M. The bracketed language might be omitted for those states which have obstacles to delegation of legislative powers in this manner.

(5) "Good faith" means honesty in fact in the conduct or transaction concerned and in the case of a merchant includes observance of reasonable commercial standards of fair dealing in the trade.

Reporter's Notes: This term, including its "fair dealing" criterion for merchants, is taken from UCC § 2-103(1)(b) which is incorporated in Art. 2A [Leases] in § 2A-103(3). Q: do we need to repeat definitions of terms from the UCC? If so, do we need a separate definition of "merchant," or is that fairly incorporated via UCC § 2A-103(2) and § 2-104(1)?

(6) "Goods" means all things that are movable at the time of identification to the lease contract, or are fixtures (UCC § 2A-309), but the term does not include money, documents, instruments, accounts, chattel paper, general intangibles, or minerals or the like, including oil and gas, before extraction. [The term also includes the unborn young of animals.]

Reporter's Notes: Verbatim from UCC 2A-103(1)(h). Is it apt for this Act?

This Act covers all "goods," not just vehicles, but does not cover any other forms of "personal property," i.e., obligations, intellectual property, etc.

(7) "Holder" means the lessor and, if the lessor's interest is assigned, an assignee for the period of the assignee's interest. The term does not include a creditor with a security interest in the lease [as chattel paper] or the owner or beneficiary of an interest in a trust that owns consumer leases.

Reporter's Notes: This is drawn from Model act. Reference in earlier drafts to "leasehold interest" is dropped as that phrase (from UCC Art. 2A) can refer to lessor's or lessee's interest.

It seems useful to have a term to refer to whoever currently owns the lease; this may be the original lessor, but in many cases it will be a subsequent assignee. Both the lessor and assignee may have responsibilities and liabilities under this Act.

The last sentence purports to insulate indirect financers from vicarious liability. Query: even if such secondary parties are not "holders" within this definition, are they not likely to be treated as assignees or transferees of the lessor, and so subject to exposure on that basis?

(8) "Lease" means a consumer lease, unless the context indicates otherwise.

Reporter's Notes: The purpose is to be able to refer to "lease" throughout this Act without having to use the full phrase "consumer lease" each time. Is this proper style to accomplish that?

(9)"Lessee" means

[Option A] a natural person who enters into [, applies for,] or is offered a consumer lease. [A cosigner or guarantor on a lease is not a lessee.]

[Option B] a person who acquires the right to possession and use of goods under a lease. [Where the context so indicates, the term includes a sublessee and a prospective lessee or applicant for a lease.]

Reporter's Notes: Option A is from Reg. M. Option B is derived from the Model and various state acts. "Lessee" (and "lessor," below) need to include prospective lessees and lessors in some provisions relating to pre-lease activity. Does adding "applies for" help in this regard? Or is the bracketed language preferable?

(10) "Lessor" means a person who regularly leases, offers to lease, or arranges for the lease of goods under a consumer lease. A person who has leased, offered, or arranged to lease goods more than five times in the preceding calendar year or more than five times in the current calendar year is subject to this Act.

Reporter's Notes: This is from Reg. M, which uses the bright-line test of five transactions in a year for inclusion. It also includes an "arranger" of leases which may necessitate some sub-definition (maybe in Comments). Note that there is a difference between this definition (limited to persons who regularly lease) and the notion in UCC Art. 2A that a "consumer lease" includes one made by a lessor who regularly leases or sells goods of the kind .

(11) "Record" means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.

(12) "Sign" means to identify a record by means of a signature, mark, or other symbol with intent to authenticate it.

Reporter's Notes: These last two definitions come from the UCC Articles 2, 2B, and 9 revisions. They are meant to accommodate electronic messaging by accepting non-paper documentation with authentications by other than hand-written signature. We probably should use these same terms consistently throughout this Act, and coordinate with the Uniform Electronic Messaging Act project that is underway..

(b) [A lease is not to be characterized as a credit sale, loan or security interest if -

(i) the lessor holds title to the goods;

(ii) the lessor reasonably expects that the goods will have more than nominal remaining useful life and market value at the end of the lease term [, and bears the risk if they do not]; and

(iii) any purchase option is for at least the anticipated market value of the goods at the time the option may be exercised.]

Reporter's Notes: This subsection (b) is an attempt to preclude arguments that a lease covered by this Act is really not a lease but a credit sale or other form of transaction subject to other laws and regulations. Such "re-characterizations" have been a significant problem in the non-vehicle leasing markets. See Letter from Christian Jones of Newcourt Financial, 5/15/97. The suggested criteria draw on distinctions in the UCC between "true" leases and security interests. Q: how does this fit with UCC § 1-201(37) [definition of "security interest"] with its detailed elaboration of when a lease is and is not a security interest? Does the "bears the risk" language undermine open-end leases?

(c) Other defined terms in this Act and the sections in which they appear are:

[List other defined terms with § references]

"Cosigner".....

"Gap amount"....

(d) Unless the context clearly indicates otherwise, other terms used in this Act have the same meaning as in Uniform Commercial Code Article 2A - Leases.

Reporter's Notes: Patterned on UCCC § 1.303, this generally adopts UCC 2A definitions for terms used occasionally in this Act, e.g., "Leasehold interest," "Sublease," "Supplier," etc.

Proposed Comments:

* * *

__. Under paragraph (a)(3) it is not a "consumer lease" if the term of the lease obligation is four months or less. This excludes from this Act short term transactions such as weekend car or tool rentals, and also transactions such as "rent to own" contracts where the consumer is not obligated to renew beyond the initial weekly or monthly term.

__. A transaction is also not a "consumer lease if the "total contractual obligation" exceeds $150,000. The rationale is that leases above this magnitude are either non-consumer in purpose, or likely to be carefully negotiated between parties of sophistication, probably with professional advice. The sum used to measure coverage is not necessarily the same as the total of payments (disclosed under Reg. M). It includes non-refundable amounts a lessee is contractually obligated to pay to the lessor, but excludes items such as:

i. Residual value amounts or purchase option prices;

ii. Amounts collected by the lessor but paid to a third party, such as taxes, licenses and registration fees.

Section 103. Exclusions; Sale Incident to Lease. [former 110, 106]

(a) This Act does not apply to:

(1) a lease to an organization, or to a person primarily for an agricultural or business purpose;

(2) a lease transaction under a public utility or common carrier tariff if a subdivision or agency of this State or of the United States regulates the charges for the leased goods or services involved;

Reporter's Notes: In (2), added word "lease" for clarity 2/98. Does phrase "or services" mean that rentals of telephone equipment are excluded so long as phone service is regulated, even though the rental aspect is not? Odd! [Q: is this ¶ unnecessary in light of (4)?? Nothing like this in Reg. M.]

(3) a license or other agreement for the use of computer software or other property or rights subject to UCC Article 2B;

Reporter's Notes: This defers to UCC Art. 2B, in process. I've added the bolded language to make this clearer, instead of the earlier phrase "intellectual property" which might be imprecise. Need to check final scope of coverage of 2B.

(4) A lease of goods which is incidental to a contract that is predominantly for the sale of goods or services;

(5) a lease of goods which is incidental to a lease of real property and which provides that:

(A) The lessee has no liability for the value of the goods at the end of the lease term except for abnormal wear and tear; and

(B) The lessee has no option to purchase the leased goods;

(6) a safe deposit box; and

(7) [Other unique transactions?? Medical assistive devices? Livestock? Etc.]

Reporter's Notes: Items (4), (5) and (6) are new, taken from the Reg. M Commentary.

(b) A lease may include a purchase of goods, services or benefits incidental to the lease, including but not limited to accessories, insurance, [, gap liability coverage (Section 312),] or service contracts. So long as the lease aspects of the transaction predominate, the incidental purchase is part of the lease.

Reporter's Notes: Reporter's language, to sort out "mixed" transactions that are partly a lease and partly a sale. The concept is implicit in UCC Art. 2A, and is explicit in the federal CLA and some of the state leasing laws.

Proposed Comments:

1. This Section is to clarify that certain transactions are outside the coverage of this Act, whether or not they meet the definition of "consumer lease" in the prior Section.

2. Paragraph (a)(1) excludes a lease to an organization, defined in UCC § 1-201(28) to include all forms of entities other than individuals, and any lease for a non-consumer purpose. This is consistent with the language in Section 102(a)(3) that a lessee must be a "natural person," and the lease must be for "personal, family or household purposes." A lease of artwork by a law firm (an organization) is excluded even though the firm's employees and guests gain personal enjoyment from it. A lease of a diagnostic computer to a doctor (a natural person) is excluded because its use is for business. A lease of a combine by a farmer is excluded on account of the agricultural purpose.

3. Paragraph (a)(2) excludes, e.g., leases of telephone equipment, cable TV converter boxes, or electrical meters or wiring, where the rates for the "lessor's" services are regulated by the government, as in the case of most public utilities.

4. Paragraph (a)(3) confirms that software licenses and other rights to use intellectual property are not covered by this Act, even if the licensing transaction is characterized in lease terms. UCC Article 2B is expected to deal adequately with this area of the marketplace.

;

5. Under subsection (a)(4), if a lease of goods is merely an "incidental" component to a transaction that is predominantly a sale of goods or services, it is excluded from this Act. Cf., Reg. M Commentary ¶ 2(e)-7. Examples are home entertainment systems, security alarm systems, or propane gas service, where the consumer must lease certain component devices in order to receive the specified service. In these cases where the primary purpose of the transaction is to provide services (cable or satellite dish programming, security monitoring) or to sell other products (propane gas), the transaction as a whole is treated as a sale and no part of it is subject to this Act.

6. Paragraph (a)(5), based on Reg. M § 213.2(e)(3), excludes the furniture portion of a lease of a furnished home or apartment where the consumer must surrender the furniture at the end of the lease term. The primary rental property is the real estate, to which this Act does not apply; the "goods" items are secondary or incidental.

7. Paragraph (a)(6) excludes leases of safe deposit boxes. The real rental is of secure space within the financial institution, not the "box" itself.

8. Paragraph (a)(7).......

9. Under subsection (b) purchases incidental to a lease -- accessories, service contracts, for example -- are subsumed in the lease, and are therefore not subject to piecemeal coverage by laws applicable to "credit sales" of those products. Thus where a lessee buys and "capitalizes" a service contract on leased goods, the lessor may treat the price of the service contract as part of the capitalized cost in the lease, and need not provide separate disclosures for it as a credit sale. Similarly if the lessee buys a vehicle accessory, e.g., a trailer hitch, as part of the lease transaction, that price may be capitalized in the lease and incorporated in lease payment calculations and disclosures. This "incidental sale" rule, of course, does not affect the substantive regulation of the price, terms or quality of such incidental items under other law. Thus insurance remains fully subject to state insurance codes as to policy coverages, premium rates, agent licensing and the like.

10. "Predominance" is the test generally used by courts to determine whether hybrid transactions are sales of goods under UCC Art. 2. Presumably the same idea will be applied to leases under UCC Art. 2A. Predominance relates to the core purpose of the transaction and is not necessarily always measured by the relative cost of the "lease" and "sale" components. For example, a lease of a home computer remains a lease even though, over time, the lessee may pay more for delivery, installation, software, and servicing than for the use of the computer itself.

Section 104. Transactions Subject to Act by Agreement. [former 105]

If the parties to a lease transaction that is not a consumer lease [acknowledge] [agree in a record signed by them] at consummation that the transaction is subject to the provisions of this Act, the transaction is a consumer lease for the purposes of this Act.

Reporter's Notes: Based on UCCC § 1.109. Need to decide how parties must manifest intent to be bound by this Act. In writing?The phrase "at consummation" added [2/98] to assure that any such agreement is part of the lease from the outset. Is this appropriate? Could there be cases where the parties modify the lease, post-consummation, to bring it under this Act?

Proposed Comments:

1. The parties may choose to stipulate to coverage by this Act even if the lease is not for a consumer purpose, or where the "purpose" is unclear, such as in a small business or agricultural context, or where it is uncertain whether the lease is within the dollar threshold for coverage. It permits lessors to establish a safe-harbor legal framework for leases at the margins of coverage.

2. The parties' intention to be bound by this Act may be expressed in various ways, and does not require any particular language. It will usually be expressed in the lease itself or accompanying documentation. [In all cases it must be part of the lease agreement at the time of consummation, to avoid having the lease subject to different requirements at different times.]

Section 105. Supplementary General Principles of Law Applicable. [former 103]

The principles of law and equity, including the Uniform Commercial Code, the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, unfair or deceptive acts or practices, or other validating or invalidating cause supplement the provisions of this Act, unless displaced by the particular provisions of this Act. [In the event of inconsistency between the Uniform Commercial Code and this Act the provisions of this Act control.] [?]

Reporter's Notes: Based on UCC § 1.103. Proposed Comments, below, assume the bracketed sentence, re "inconsistency," stays in.

Proposed Comments:

1. Like UCC § 1-103, this section confirms that this Act does not completely occupy the field for the transactions it covers. In particular, consumer leases remain subject to UCCArticle 2A (Leases) for such matters as contract formation, performance responsibilities, priority as to third parties, and remedies for breach. Other provisions of the UCC, such as the general obligation of good faith [UCC § 1-203] likewise continue to apply. So also do common law or statutory proscriptions concerning unfair or deceptive acts or practices relating to consumer transactions.

2. Other principles of law apply unless "displaced by" or "inconsistent" with this Act. These can be two different forms of nullification. For example, Section 213(b) [Preservation of Lessee's Claims and Defenses] would displace any common law or statutory right to use a waiver of defense clause. By contrast, Section 310 [Early Termination Liability] states factors for early termination liability somewhat different from those in UCC Article 2A-504. In a given case these may lead to inconsistent answers on permissible lease terms. The answer dictated by this Act controls.

3. Consumer leases covered by this Act may also be covered by the federal Consumer Leasing Act and Federal Reserve Board Regulation M, principally with respect to disclosure. That federal law applies on the constitutional basis of federal supremacy and is not merely "supplemental" within the meaning of this Section. By virtue of the "relation to state laws"provision in the federal act [CLA § 186; Reg. M § 213.7], it preempts any state law (including this Act) to the extent the state law is inconsistent with it.

Section 106. Waiver; Agreement to Forego Rights; Settlement of Claim [former 104]

(a) Except as otherwise permitted by this Act, a lessee may waive or agree to forego rights or benefits under this Act only in settlement of a bona fide dispute [or collection claim].

(b) A settlement in which a lessee waives or agrees to forego rights or benefits under this Act is invalid if the court finds the settlement to have been unconscionable when made. Matters relevant to unconscionability include the competence of the lessee, any deception or coercion practiced upon the lessee, the nature and extent of legal advice received by the lessee, and the value of the consideration.

Reporter's Notes: Based on UCCC § 1.107. Subsection (a) generally invalidates a consumer's contractual waiver of rights under this Act, either in the lease agreement or otherwise. But disputed claims by or against a consumer, or collection claims, may be settled unless unconscionable. Q: do we need subsection (b) in light of general "unconscionability" provision in UCC Article 2A (or in § 109 of this Act)?

Section 107. Territorial Application; Limitation on Choice of Applicable Law and Forum

[former 109]

(a) Except as otherwise provided in this Section, this Act applies to a lease that is consummated in this State.

(b) A provision in a lease providing that the lease is governed by the law of a particular jurisdiction is enforceable in this State if the jurisdiction selected is the place where either: --

(1) the lease is consummated,

(2) the goods are delivered to the lessee, or

(3) the lessee resides at the time the lease is consummated.

(c) If a lease [consummated outside this State] does not contain an enforceable provision on governing law, the lease is governed by the law of the jurisdiction where the lease is consummated.

(d) For purposes of this Section, consummation occurs where the lessee executes a contractual commitment to the lease.

(e) If a judicial forum provided for in a lease is a forum that would not otherwise have jurisdiction over the lessee, the choice is not enforceable.

Reporter's Notes: Re written 2/98 to reflect 10/97 directions from Committee. This is meant as a straightforward rule for (1) when a contractual choice of law clause will be enforced, (2) what law applies absent such an enforceable clause, and (3) when a choice of forum provision will be enforceable.

Proposed Comments:

1. As a general proposition, under subsection (a), this Act will apply whenever a lease is consummated in this state. As a matter of policy, however, the parties' choice of governing law should be given effect unless the law chosen to apply bears no relationship to the parties or the transaction, is unfair to the consumer lessee, or can be manipulated by the lessor to its advantage. Thus subsection (b) gives effect to a choice of law clause which invokes either the law of the place where the deal is "closed," or where the goods are delivered, or where the lessee resides. In many consumer leases, all three indicators will point to the same jurisdiction: a vehicle lessee typically contracts with, and takes delivery from, a dealer close to the lessee's home. The law of that state obviously should apply, and under subsection (b) it would regardless of which of the three choice-of-law foci the lease contained. Even without a choice of law clause in the lease, subsection (c) would invoke the law of that same state, i.e., where the lease was consummated.

2. In some cases the lessor may be located in a different state from the lessee. This could easily be the case in an area close to state lines -- such as metropolitan Washington, D.C., or New York city -- where consumers regularly shop outside their home state. Assume a consumer living in Maryland leases a car from a dealer in northern Virginia, executing all paperwork and taking delivery at the dealer's Virginia premises. Under this section the lease could provide for either the law of the consumer's state of residence (Maryland), or the law of the lessor's premises (Virginia, where the consumer signed the lease). If the vehicle were delivered at the lessee's employment site in Washington, D.C., the lease could also make D.C. law controlling. Any other choice of law would be unenforceable in any State adopting this Act. The default rule in subsection (c) would then come into play, and the lease would be construed under Virginia law, as the place where the lessee consummated the lease.

3. There is an instinctive attractiveness in having all consumer contracts governed by the law of the consumer's home state. As a matter of practicality, however, lessors conducting business face to face with customers on the lessor's premises would face very difficult compliance problems if their leases were required in all cases to be governed by the law of the consumer's residence. The examples above demonstrate the point. This Section rejects such a "customer's state only" choice of law policy, and would allow such lessors always to contract in terms of the law of the place of business (where the lessee executes the lease, and where, in most cases, the goods are delivered). On the other hand, some lessors may operate from an out-of-state home office, perhaps in a distant state or even outside the United States, and market their goods through brokers or agents, or by mail or phone, or over the Internet. Here it is inappropriate to subject the consumer lessee to the laws of a distant jurisdiction which the consumer may never have visited and with which the consumer has no connection or familiarity. In this situation, under this Section, the lessor could not "export" its home-state law, but would have to contract for choice of law in terms of where the lessee executes the lease commitment, takes delivery, or resides -- all pointing to the lessee's neighborhood.

[Section 108. Obligation of Good Faith. [former 107]

Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.]

Reporter's Notes: Same as UCC § 1-203. "Good faith" is defined in Section 102(a)(5) of this Act the same as in the UCC. Query: do we need this at all, given general applicability of UCC?

[Section 109. Unconscionability.] [former 108]

Reporter's Notes: No specific text proposed. UCC § 2A-108 is a comprehensive statement on unconscionability, including particular applications in consumer leases, patterned on UCC § 2-302 [Sales of Goods] and UCCC § 5.108. There seems no need to reproduce that provision here unless we mean to change it.

Section 201. Lease Advertising.

(a) An advertisement for a lease must comply with the advertising requirements of the federal Consumer Leasing Act [whether or not the advertised lease is covered by that Act]. For purposes of this Section, "advertisement" has the same meaning as in that Act.

(b) A person may not publish, broadcast or distribute, or cause to be published, broadcast or distributed, an advertisement for a lease that is false, deceptive, or misleading, or that misrepresents -

(1) the material terms or conditions of a lease;

(2) that the transaction is other than a lease; [or

(3) that a particular lease rate

(A) is generally available; or

(B) is directly comparable to an Annual Percentage Rate in a credit transaction.]

(c) This section does not apply to the owner or employees, as such, of any medium in which an advertisement appears or through which it is disseminated.

Reporter's Notes: Basically unchanged from earlier drafts, although subsection (b)(3) is new [10/97]. It is particularly relevant if we proceed to require or authorize use of lease rates calculated similarly to those under TILA.

Proposed Comments:

1. For any consumer lease advertisement, subsection (a) makes compliance with the federal Reg. M a state law rule as well. This extends the substance of the Reg. M advertising rules to transactions outside Reg. M's scope (i.e., over $25,000) but within the scope of this Act (up to $150,000).

2. Subsection (b) is a general "false advertising" proscription in the leasing context. It applies to any "person" who advertises, not just lessors. Thus a manufacturer advertising lease arrangements through its franchised dealers would be covered. The terms "false, deceptive, or misleading" are to be interpreted consistently with the broad body of law on advertising practices developed under the Federal Trade Commission Act and comparable state laws.

3. Subsection (b) also enumerates several aspects of a lease which if misrepresented in advertising, are per se violations without regard to the reasonableness of consumer understanding of the advertisement. "No money down" would be an example under paragraph (b)(1) if in fact a lessee must make a payment at consummation or otherwise before delivery. An advertisement claiming or intimating that a lease transaction is a credit sale, or that the lessee becomes the owner of the goods, would violate paragraph (b)(2).

4. Neither the federal CLA nor this Act require a lessor to disclose a lease rate calculated in a particular manner. But neither do the federal law or this Act prohibit lessors from disclosing or advertising a lease rate, and lessors are therefore free to compute rates in various ways (subject to Reg. M § 213.4(s) which requires a cautionary statement about any advertised or disclosed rate). Subsection (b)(3) prohibits advertising misrepresentation that a particular rate is generally available when it is not or when it is subject to such stringent conditions that few lessees will qualify. The subsection also prohibits falsely claiming or suggesting that a lease rate is comparable to an APR in a credit transaction. [Unless the advertiser uses a lease rate calculation formula demonstrably and virtually identical to that for credit transactions under the federal Truth in Lending Act (and Reg. Z),] an advertisement violates this subsection if it invites prospective lessees to compare the lease rate to credit rates or suggests that the lease rate is less costly than credit rates.

Section 202. Pre-Lease Availability of Sample Form.

A lessor must make a blank sample of its current lease form readily available [at its place of business][and [or] by electronic transmission] for examination at the request of a prospective lessee before the consummation of a lease. If a lessor uses more than one lease form, the lessor satisfies this requirement by making available either a commonly used form or the form pertinent to the type of lease about which the prospective lessee has inquired.

Reporter's Notes: Unchanged over last several drafts. It reflects a common provision in recent state leasing legislation, and seems generally useful.

Proposed Comments:

1. As the leasing of consumer goods becomes more common, a recurring concern is that lease documents are often lengthy and complex, and that their terminology and standard provisions are unfamiliar to consumers. Moreover, disclosures given only at consummation do not adequately permit or encourage consumers to study or review the lease documentation ahead of time, or to compare one lessor's form with another's. This Section responds to those concerns by requiring lessors to make sample lease forms available to prospective customers on request. This includes having such forms available at each of the lessor's business establishments where it consummates leases, or furnishing a form by fax to prospective customers who request it in that medium. This Section does not obligate the lessor to incur the expense of mailing sample forms in response to telephone or mail inquiries.

2. Lessors may use a number of different lease forms, for different lease products or goods, or anticipating transfer to various assignees. The lessor is required under this Section to provide only one sample, and is expected to use reasonable judgment to provide a representative sample or one suited to the prospective customers interests if these are known.

Section 203. Rebate or Discount for Referrals. [former 205]

A lessor [person ?] may not induce or attempt to induce any prospective lessee to consummate a lease by offering a subsequent [post-consummation ?] rebate, discount, commission or other consideration, on the condition that the lessee provide information or assistance for the purpose of enabling the lessor to lease or sell goods to another person.

Reporter's Notes: Rettained at Committee's instruction (10/97). Based on provisions in UCCC, and Model, CA, NH, NY acts, targeted on "referral sales" gimmicks that are inherently deceptive. I'm still uncertain of the need for it in a leasing law. The practice would probably violate a state UDAP Act in any event. Note that it applies only to pre-lease inducements where the customer is vulnerable to the promise of discounts.

The more elaborate version in UCCC § 3.309 provides a more severe sanction for violations, i.e., the consumer may retain the property without having to pay for it. Seems unnecessary here.

Proposed Comments:

1. In the past consumers have proved vulnerable to sales tactics which offer the prospect of savings based on post-transaction referrals of other customers. For example, a merchant might promise a consumer a $25 rebate on the purchase price for each friend or neighbor whose name the consumer supplies if the friend or neighbor buys (or leases) goods from that merchant. Or perhaps the rebate only requires that the friend or neighbor visit the merchant's showroom. Whatever the promise, such referral-sales gimmicks are inherently misleading, as the customer is led to believe that significant savings will accrue when in fact they rarely materialize because few friends or neighbors take the bait. This Section prohibits referral inducements in the marketing of leases.

2. What is prohibited are inducements offered prior to lease consummation which depend on events occurring after lease consummation. If before lease consummation, a lessor solicits and pays or credits a customer for referrals, the practice is not unlawful. Similarly, if after lease consummation a lessor agrees to pay or credit the lessee for referrals, that too is not an unlawful practice.

3. The sanction for a lessor who violates this Section includes statutory damages under Section 501(b). But in an appropriate case a lessee might also recover actual damages based on the amount or range of savings promised or implied in the referral inducement.

Section 204. Payment or Trade-in Pending Execution of Lease; Refund or Return.

[former 303]

(a) If a prospective lessee has made a payment to a lessor or has delivered possession of trade-in goods pending the consummation of a lease, and the lease application is [withdrawn or] not approved, the lessor must promptly, and in no event more than [10] days after the payment or surrender, return the trade-in goods and refund any payment made. The lessor may not sell or transfer trade-in goods until consummation of the lease.

(b) If a lessor contracts to purchase property from a prospective lessee separately from a lease, the lessor may not withhold or otherwise condition payment for the property pending consummation of a lease.

Reporter's Notes: The earlier draft was based on the Model, CA, NH, WI acts, with some re-write. This now reflects Drafting Committee changes as of 2/97. The earlier version of subsection (b) would have permitted a lessor who "bought" the lessee's trade-in car outright to retain the agreed price for up to 30 days in anticipation of applying it to the eventual lease, or up to 75 days for a special-order vehicle. The Committee voted 7-0 to delete this provision, finding no justification for a lessor to "buy" the consumer's trade-in car and retain the price for any extended period of time. Subsection (b) confirms this vote.

Open questions: Is 10 days the right time frame in (a)? [Maybe 5 business days?] Should the rule apply only when the customer is turned down by the lessor, or also when the customer withdraws an application?

Proposed Comments:

1. When a consumer surrenders a trade-in or makes some other advance payment to the lessor in anticipation that they will soon consummate a lease, the consumer is left in a very vulnerable position if a lease is never concluded. If a vehicle lessor, for example, disapproves the lease application, and is unwilling or slow to return the trade-in or refund the advance payment, the consumer has no old car, no new car, and is out of pocket the advance payment. Where the consumer wants to withdraw the application, an uncooperative lessor has substantial leverage to compel the customer to conclude a lease. Recognizing that such retainages can be abused, subsection (a) requires the lessor in these circumstances to return "promptly" any trade-in and refund any advance payment if a lease deal is not closed. The ten-day period runs from the time the customer's application is disapproved or withdrawn.

2. Occasionally a customer will agree, in advance of any lease agreement, to sell existing goods to a leasing dealer. This separate sale, from customer to dealer, may occur for a number of reasons. The consumer may want, for example, to dispose of an old car before shopping for a new one. Or the customer may want to maximize the value of the old car while waiting for a new model year, or a new car with custom features. Under subsection (b) the prospective lessor cannot hold the purchase price hostage until the customer agrees to a lease from that dealer.

Section 205. Disclosure; Form of Lease Document; Copies to Lessee. [former 203]

(a) Prior to the consummation of a lease the lessor must make the disclosures required by the federal Consumer Leasing Act [whether or not the lease is subject to that Act].

(b) A lease agreement must:

(1) be [a record, and if ]in writing, in at least ___ point type;

[FYI only: ] This is 8 point type

This is 10 point type

This is 12 point type

(2) clearly indicate that it is a lease agreement;

(3) identify the lessor and lessee, the goods to be leased, and any goods traded in or applied as a capitalized cost reduction or similar credit; and

(4) be signed by the [lessor and ?] lessee.

(c) If casualty insurance on the leased goods is not included in the lease, the lease must contain or be accompanied by a record statement substantially as follows:

No insurance coverage for physical damage to, or loss of, the leased goods is provided under this lease. [Obtaining such insurance is the lessee's responsibility.]

(d) A lessor may not present for the lessee's signature a lease that contains blank spaces to be filled in after it has been signed except that, if the goods are to be specially ordered for future delivery to the lessee, the due dates of periodic lease payments and specific identifying numbers, marks or similar information concerning the goods may be inserted in the lease after its execution. (e) [Promptly on] [At] consummation of a lease the lessor must deliver to the lessee a completed copy of the lease [, and a copy of any other record signed by the lessee in connection with the transaction, including but not limited to application, purchase order, or worksheet.]

Reporter's Notes: Subsection (a) adopts Reg. M disclosures as state law as well for all leases subject to this Act, i.e., up to $150,000. Is the parenthetical language needed to make this clear?

Subsection (b) states basic formalities for all leases: a written, signed lease document identified as such, with certain minimum contents. Subsection (c) requires a warning if casualty insurance is not included in the lease. Subsection (d) prohibits lessors from taking leases with blank spaces, except in special-order situations. Subsection (e) requires a copy of the lease be given the customer, and also that the lessor provide copies of other transaction documents. Should this be routinely, or only at lessee's request?

Section 206. Cosigner Notice. [former 204]

(a) For purposes of this section, "cosigner" means a natural person who assumes liability for the obligation of a lessee without compensation, [but does not include a co-lessee entitled to possession and use of the leased goods]. The term includes a natural person whose signature is requested as a condition of making a lease to another natural person, or as a condition for forbearance on collection of another natural person's obligation that is in default. A natural person who does not receive goods, services, or money in return for a lease obligation does not receive compensation within the meaning of this definition. A person is a cosigner within the meaning of this definition whether or not the person is designated as such on a lease obligation.

(b) A lessor or holder may not [accept] [request] [require] a cosigner on a lease unless, prior to the cosigner becoming obligated, the lessor gives the prospective cosigner a separate [record] statement in substantially the following form:

You are being asked to guarantee this lease. Think carefully before you do. If the lessee doesn't pay, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility.

You may have to pay up to the full amount of the lease obligation if the lessee does not pay. You may also have to pay late fees or collection costs, which increase this amount.

The lessor can collect this obligation from you without first trying to collect from the lessee. The lessor can use the same collection methods against you that can be used against the lessee, such as suing you, garnishing your wages, etc. If this lease is ever in default, that fact may become a part of your credit record.

This notice is not the contract that makes you liable for the lease obligation.

Reporter's Notes: This is based on the FTC Credit Practices Rule, 16 CFR § 444.3, but substituting "lessor/lessee" for "creditor/borrower," and "obligation" for "debt." A similar provision is in UCCC § 3.208. The FTC Rule applies only to lenders and installment sellers, and a parallel co-signer disclosure for leases seems appropriate.

Section 207. Information During Lease Term. [former 306]

(a) During the term of a lease:

(1) The holder must provide the lessee a written receipt for any payment made in cash.

(2) Upon record request from the lessee the holder must promptly provide to the lessee a [record] statement of the dates and amounts of the periodic lease payments that have been received by the holder under the lease and the total amount of the remaining periodic lease payments. An amount in the statement that is estimated must be so identified.

(3) Upon record request from the lessee the holder must provide to the lessee a record statement or estimate of the lessee's current early termination obligation.

[Option A: If the statement is based on an estimate of realized value, the statement must so indicate and show the amount of the estimated realized value as a projected deduction from the early termination obligation.]

[Option B: The statement must indicate that the early termination obligation will be reduced by the realized value of the vehicle, if that is the case.]

(b) A holder may not charge the lessee for providing one statement under subsection (a)(2) or (a)(3) of this Section in a 12-month period. The holder may impose a reasonable fee for providing additional statements in a 12-month period if that fee is disclosed at the time of the lessee's inquiry.

Reporter's Notes: This subsection is based on provisions in the Model, MD, NY and WV acts, requiring certain follow-on information from the lessor/holder.

Subsection (a)(3) is re-written at the Committee's direction. The difference between the options is that Option B would require the holder to put a dollar figure on the estimated realized value.

Section 208. Renegotiation or Extension. [former 307]

(a) The requirements of Section 205 of this Act apply to a renegotiation of a lease, but not to an extension of a lease for a period of six months or less. A renegotiation occurs when a lease is satisfied and replaced by a new lease undertaken by the same lessee.

[(b) A renegotiation does not constitute a transaction subject to warranty or other provisions that apply to the sale of used goods under the laws of this State.]

Reporter's Notes: Subsection (a) is drawn from the Model and various state acts. It also parallels Reg. M, including its definition of "renegotiation." A significant re-writing of the lease will require all new disclosures.

Bracketed subsection (b), from the Model act, is to avoid an implication that the renegotiated lease falls under "used car" sales laws. Q. Is it appropriate or necessary here?

Section 209. Satisfaction of Lease. [former 308]

When a lessee has satisfied [performed?] all obligations under the lease, the holder must deliver or send to the lessee at the lessee's last known address [a record] [documentation] to indicate payment in full. A copy of the lease marked "satisfied," "paid in full" or similar term fulfills this requirement. This documentation does not operate to release the lessee from liability for events discovered by the holder after delivering or sending the [record] [documentation].

Reporter's Notes: Drawn from the Model and various state acts. A receipt or "paid in full" copy of the lease seems appropriate. The lessor's obligation is automatic and does not require a request from the consumer.

Section 210. Prohibited Lease Terms. [former 206]

(a) A lease may not contain a provision by which:

(1) the holder may arbitrarily and without reasonable cause accelerate the maturity of any part or all of the amount owing on the lease;

(2) the lessee gives a cognovit, power of attorney or other authorization to confess judgment, or an assignment of wages;

(3) the lessee gives the holder or another person authority to enter upon the lessee's premises unlawfully, or to commit a breach of the peace in the repossession of the goods; or

(4) the lessee waives a right of action against the holder for an illegal act committed in the collection of payments under the lease or in the repossession of the goods.

(b) An agreement, waiver or provision prohibited by this Section is unenforceable but does not otherwise affect the validity of the lease.

Reporter's Notes: Based on provisions in UCCC, Model, NH, NY, MD acts. These are baseline restrictions in consumer credit transactions.

Section 211. Security Interest Restricted; Security Deposit. [former 207, 208]

(a) A lease or other document executed by the lessee in connection with the lease may not provide for the creation of a security interest in personal or real property of the lessee, other than the leased goods, to secure the payment of the obligations arising from the lease. This prohibition does not apply to the taking of a security deposit, advance lease payment or other prepayment under subsection (c) of this Section, or the taking of a security interest in the proceeds of insurance [or other service contract] on the leased goods. A security interest taken in violation of this section is void but does not otherwise affect the validity of the lease.

(b) Nothing in this Section precludes a holder from making a permissive [protective] financing statement filing under Article 9 of the Uniform Commercial Code.

(c) A lease may provide for a security deposit, advance lease payment or other prepayment [in a reasonable amount][not to exceed ___ periodic lease payments under the lease]. A holder is not required to pay interest on such a security deposit, advance lease payment or other prepayment, but must promptly account to the lessee in a record on the application of those funds when they are applied.

Reporter's Notes: Based on UCCC § 3.301, and Model, CA, NH, NY, MD, WI acts. The UCCC provision, and the analogous FTC Credit Practices Rule, 16 CFR § 444.2, essentially limit sale creditors to purchase-money security interests. In the lease context, the lessor retains comparable rights in the leased goods from the nature of the lease arrangement, and should not need to encumber other property of the lessee. If the lease is truly a lease, the lessor's interest should be safe from third-party claimants including the lessee's trustee in bankruptcy. Also, allowing the lessor to layer a UCC Article 9 security interest onto the lease may complicate the transaction, especially on repossession and foreclosure. Which rules control, this Act, or UCC Article 9 (or perhaps the UCCC)?

Subsection (b) allows the lessor/holder to file a UCC Art. 9 financing statement as a protective measure under UCC § 9-408. This may be a prudent thing for the lessor to do in some cases, as a precaution lest a court later characterize the transaction as a credit sale. But such a permissive filing does not itself make the lease a security interest.

Subsection (c) deals with security depositsand other prepayments. Perhaps limit their amount, and clarify no interest need be paid.

Section 212. Delinquency and Default Charges. [former 311]

(a) A lease may specify penalties or other charges for a lessee's delinquency or default but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the delinquency or default, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy.

(b) A lease may provide for the holder's right to collect from the lessee a late charge on a lease payment that is delinquent for a period of 10 days or more in an amount provided in the lease but not to exceed the greater of $10.00 or 5 percent of the unpaid portion of the late payment. A holder may not assess or collect a late charge under this subsection when the only delinquency is late charge(s) assessed on an earlier lease payment or payments. A late charge permitted by this subsection is reasonable for purposes of subsection (a) of this Section.

(c) A lease may provide that charges on default by the lessee may include the lessor's collection and court costs, but may include attorney's fees only on referral of the matter to an attorney not an [salaried] employee of the holder.

Reporter's Notes: Re written for consistent style with preceding paragraphs. No change in content intended.

(d) Where a lessee's default results in a renegotiation or extension of a lease, the holder may impose a reasonable charge for the renegotiation or extension.

Reporter's Notes: Reporter's suggestion; maybe helpful, possibly unnecessary. A separate charge for writing a renegotiation or extension is not directly a "collection cost." But where the re-write is in fact a work-out arrangement, it seems logical to impose a comparable reasonableness test. Maybe put this in § 208?

Proposed Comments:

1. Subsection (a) replicates the rule stated in Section 183(b) of the federal Consumer Leasing Act, recognizing that specified charges imposed by the lessor or holder for the lessee's default and delinquency are in the nature of liquidated damages and so must be reasonable in light of the stated factors. This means that while an appropriate charge is related to actual damages, it is not confined to that sum and may reflect other ingredients or purposes, such as permitting ease of calculation and discouraging breach. This "reasonableness" standard applies to any charge that may be imposed on the lessee for breach of terms of the lease, including late or default charges, collection costs, and charges for incidental breaches such as remitting payment by a check that bounces.

2. Late charges are conclusively deemed reasonable if they comply with this subsection. This requires a ten day grace period, and the amount of the late charge cannot exceed the larger of $10.00 or 5.0% of the late payment. Thus if a $150.00 payment is due on April 15, a late charge of $10.00 could be imposed on April 26. If the missed April 15 payment were $400.00, a $20.00 late charge could be imposed on April 26. But if, when a $400.00 payment is due, the consumer remits only $200.00, the late charge is limited to $10.00 (5% of the unpaid portion).

The second sentence of subsection (b) prohibits the pyramiding of late charges, i.e., imposing a new late charge merely because the consumer has not paid a previously imposed late charge. This does not prohibit the imposition of successive late charges if a scheduled payment (e.g., a periodic lease payment of $400.00) itself remains unpaid in subsequent payment periods.

3. Under subsection (c), a lease may impose on the lessee the costs of collection after default, either as actual costs incurred, a fixed dollar figure, or as a percentage of the unpaid obligation. This of course is subject to the "reasonableness" standard in subsection (a); for example, a default charge of 15% of the unpaid balance may be unreasonable if default occurs early in the lease and the charge would far exceed the actual costs of collection. Collection costs may include court costs, and attorney's fees where the matter is referred to a non-employee attorney.

Section 213. Assignment of Lease; Preservation of Lessee's Claims and Defenses.

[former 311]

(a) Until [30] days after a lessee has notice that the lease has been assigned or transferred, the lessee may make payments to the last known holder of the lease. If otherwise timely, such a payment to the last known holder is not subject to a late charge.

Reporter's Notes: Drawn from the Model and other state acts. Cf.. UCCC § 3.204. This protects the lessee who sends payments to a holder after the lease has been sold or transferred. Indirectly it requires any transferee who expects to receive payments to notify the lessee, but it does not specify the form or content of that notice. Should it?

(b)(1) Notwithstanding any provision in a lease, a holder is subject to all claims and defenses arising from the lease which the lessee could assert against the lessor or, in the case of a finance lease, the supplier. A lessee's recovery from a holder under this subsection may not exceed amounts paid by the lessee under the lease.

(2) A lessor or holder may not take or receive a lease which fails to contain the following provision in at least 10-point bold type:

[Option A]

ANY HOLDER OF THIS CONSUMER LEASE IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE LESSEE COULD ASSERT AGAINST THE LESSOR [OR SUPPLIER] OF THE LEASED GOODS. RECOVERY HEREUNDER BY THE LESSEE SHALL NOT EXCEED AMOUNTS PAID BY THE LESSEE HEREUNDER.

[Option B] NOTICE

This lease [will] [may] be transferred to a company other than the lessor, and you will make your lease payments to that company. You retain all the legal rights you have against the lessor [and supplier] and may assert them against the company that holds the lease, except that you cannot recover from that company more than you have paid under the lease.

Reporter's Notes: Redone at Committee's instruction, 2/97, to state a substantive rule, not just require a notice.

By FTC Rule, "holder in due course" protections for assignees of consumer credit contracts have effectively been abolished for more than 20 years. Subsection (b)(1) states the parallel proposition that there can be no "holder in due course" of a consumer lease. This rule permits a lessee to defeat a holder's collection efforts by proving defenses such as breach of warranty or fraud. It also permits the lessee to assert claims, i.e., recover affirmatively from the holder up to the total of amounts paid under the lease. For example, assume after four months the leased vehicle proves to be a total lemon, and the lessee properly revokes acceptance under UCC 2A-517. Lessee has a claim to recover all monies paid to that point from the holder.

Query: should this draft preserve claims against a "supplier" as well as against the original lessor? In most leases, especially for vehicles, the operative warranty is the manufacturer's, not the lessor's. Also, if the lease is a "finance lease," the supplier will likely have made warranties to the lessee. Cf.. UCC 2A-209. If such a manufacturer or supplier warranty is breached, the lessee may assert that breach against the holder. A "hell or high water clause," or a statutory version of it, would not operate to cut off the lessee's rights. UCC 2A-407, Comment 2, recognizes that any other result "is not tenable" under long-standing case law and statutory precedents for consumer obligations.

Subsection (b)(2) would require a parallel notice to that required by the FTC "Holder in Due Course" Rule, 16 CFR Part 433, which applies only to credit transactions. It preserves against an assignee the lessee's substantive contract and warranty rights against the lessor and any supplier of the vehicle. The FTC used this "notice" technique (destroying holder-in-due-course rights on the face of the contract) rather than attempt a direct substantive intrusion on state law.

It may be arguable that, with the substantive rule stated expressly in (b)(1), the Notice is not necessary at all. Does it serve an informational purpose for consumers (I have added an Option B notice that seems more intelligible than the FTC's). Or is it a disincentive for abuse by lessors? I am unaware of any reported case where a consumer lease assignee has claimed to be a HDC.

Section 214. Sublease. [former 314]

(a) Unless the lease so provides, a lessee under a lease with a term of less than one year may not sublease or assign the lessee's rights and interests.

(b) A lessee under a lease with a term of one year or more may sublease or assign the lessee's rights and interests with the [written][ record] consent of the holder. A holder's withholding of consent is lawful unless the lessee demonstrates that the holder lacked a good faith belief that the sublease or assignment jeopardized its rights under the lease.

(c) Unless otherwise agreed by the holder, the obligations of a lessee under the lease are not affected by a sublease or assignment, and the original lessee and the sublessee or assignee are jointly and severally liable under the assigned lease.

Reporter's Notes: Based on a proposal in Connecticut. A lessor and lessee are always free to negotiate and agree on a modification of the lease, including a "sublease" or "assignment" by the lessee -- like an "assumption" of a mortgage. It seems useful to reinforce that possibility by statute, applying a good faith test to the holder's conduct. This draft puts the burden of proof on the consumer to show the holder had no good grounds for refusing to consent to the sublease.

[Section 215. Warranties of Quality and Title.] [former 209]

Reporter's Notes: No text at this time. Correlate with UCC Art. 2, 2A, 2B developments. The question is whether lessee's warranty rights are adequately protected under UCC Art. 2A without repeating or elaborating here.

Section 301. Coverage of This Part.

This Part (Sections 301-313) applies only to a lease of a motor vehicle. Except as specifically noted, the provisions of this Part apply in addition to, and not in lieu of, the provisions of Parts 1, 2, 5 and 6 of this Act.

Reporter's Notes: This "scope" provision confirms that this sub-set of rules applies only to vehicle leases, in addition to the general provisions earlier in this Act.

Section 302. Definitions for Motor Vehicle Leases.

For purposes of this Part:

Reporter's Notes: Most of the definitions that follow are stated as options. One set of options is based on the Model act, and versions of them appear in the CA, FL, IN, NH, NY and WI acts. These fairly intricate definitions are necessary to parse out the lease cost structure, including gap coverage and early termination liability, and to permit calculation and possibly disclosure of the Rent Charge and Lease Rate.

The 1996 revision of Reg. M significantly affects this set of definitions. Thus, where Reg. M defines a term that is exactly or nearly the same as one in the Model and state acts, this draft uses the Reg. M term, and sets out the Reg. M definition as an option for this Act. Definitions in this Act relating to disclosures and calculations should be consistent with those in the federal Consumer Leasing Act. Otherwise they may be preempted by Reg. M. E.g., this draft uses and defines the term "rent charge" the same as in Reg. M, instead of using the term "lease charge" as in the Model and various state acts. Indeed, since Reg. M controls disclosure and contains a federal "reasonableness" standard for termination liabilities, there seems more reason to synchronize these definitions with Reg. M than with UCC Art. 2A.

Might it be possible to adopt en masse all the relevant definitions from Reg. M, without restating them here? E.g., "The following terms have the same meaning as in the federal Consumer Leasing Act: (list terms)."

(1) "Adjusted capitalized cost" means

[Option A] the gross capitalized cost less the capitalized cost reduction, and is the amount used by the lessor in calculating the base periodic payment.

[Option B] means the amount which serves as the basis for determining the base lease payment, computed by subtracting from the gross capitalized cost any capitalized cost reduction.

Reporter's Notes: This is the functional equivalent of the "amount financed" in a credit transaction. Option A is the Reg. M definition. Option B is from the Model and state acts.

(2) "Base periodic payment" means that portion of the periodic lease payment which is the sum of the rent charge, depreciation and other amortized amounts attributable to that payment period.

Reporter's Notes: This is the "principal and interest" portion of the monthly payment, without adding taxes or other incidentals. The term is used, but not specifically defined, in Reg. M. I think this definition is consistent with Reg. M usage.

(3) "Capitalized cost reduction" means

[Option A] the total amount of any rebate, cash payment, net trade-in allowance, and noncash credit that reduces the gross capitalized cost [to the adjusted capitalized cost].

[Option B] any payment made by cash, check, rebate or similar means that is in the nature of a down payment by the lessee and any net trade-in allowance granted by the lessor at the inception of the lease for the purpose of reducing the gross capitalized cost [to the adjusted capitalized cost]. The term does not include any base lease payment due at the inception of the lease.

Reporter's Notes: This is essentially the down payment including any trade- in. Option A is verbatim from Reg. M. Option B is from the Model and various state acts.

(4) "Constant yield method" means -

(a) in the case of a periodic payment lease, the method of determining the rent charge portion of each base periodic payment pursuant to which the rent charge for each computational period is earned in advance by multiplying the constant periodic rate implicit in the lease times the balance subject to rent charge at the beginning of theh period. At any point during the scheduled term of a periodic payment lease, the balance subject to rent charge is the difference between the adjusted capitalized cost and the sum of (i) all depreciation amounts accrued through the preceding computational periods and (ii) the first base periodic payment;

(b) in the case of a single payment lease, the method of determining the periodic earning of the rent charge portion of the single lease payment pursuant to which the rent charge for each computational period is earned in advance by multiplying the constant rate implicit in the lease times the balance subject to rent charge as it increases during the lease term. At any point during the term of a single payment lease, the balance subject to rent charge is determined by subtracting from the residual value the total rent charge scheduled to be earned over the lease term and adding to the difference all rent charges accrued through the preceding computational periods.

Reporter's Notes: Basically a simple-interest formula for allocating periodic payment components to rent charge (interest) and capitalized cost (principal), but with periodic rent charges considered "earned" at the beginning of the period. It does not include the somewhat similar "Rule of 78s" method, nor the distinctive "straight-line" method.

Prior subsection (c) to be moved to Comment:

"(c) in the case of either a periodic payment lease or a single payment lease, the periodic rent charge calculation is based on the assumption that the holder receives the lease payment or payments on the exact due date or dates and that the lease goes to its full term."

Cf. NVLA critique [12/97].

(5) "Gross capitalized cost" means

[Option A] the amount agreed upon by the lessor and the lessee as the value of the leased property and any items that are capitalized or amortized during the lease term, including but not limited to taxes, insurance, service agreements, and any outstanding balance from a prior loan or lease.

[Option B] the amount which, when reduced by the amount of the capitalized cost reduction, equals the adjusted capitalized cost. The term includes all items that are capitalized in the lease and, after the application of the capitalized cost reduction, amortizes to the residual value by the depreciation portions of the periodic lease payments over the term of the lease. For a single payment lease, the capitalized cost amortizes to the residual value by the depreciation portion of the single lease payment. The capitalized cost may include, without limitation, taxes, registration, license, acquisition, administration, assignment and other fees, and charges for insurance, gap protection, accessories and their installation, delivering, servicing, repairing or improving the goods, and other services and benefits incidental to the consumer lease. The term also may include, with respect to any property traded in connection with a lease, the unpaid balance of any amount financed under an outstanding credit agreement or the unpaid portion of the early termination obligation under any lease or other obligation of the lessee. The term capitalized cost does not include any rent charge.

Reporter's Notes: This is generally comparable to the "amount financed," or principal balance, in a credit transaction. Option A is verbatim from Reg. M. Option B is from the Model and various state acts.

(6) "Group credit insurance" means group credit life insurance, group credit accident insurance, group credit health insurance, group credit accident and health insurance, group disability insurance or group credit unemployment insurance.

(7) "Lease rate" means the nominal annual percentage rate that reflects the amortization of the adjusted capitalized cost to the residual value over the term of the lease, calculated in accordance with Section 313.

Reporter's Notes: This is the functional equivalent of the "annual percentage rate" in credit transactions. This term is not currently used in Reg. M or in any state leasing law (although a recent Canadian law requires such a disclosure). The complex mathematics for calculating this rate are deferred to a separate section (§ 313).

(8) Option A: "Motor Vehicle" means a device propelled or drawn by any power other than muscular power, upon or by which a person or property is or may be transported or drawn upon a public highway, road or street,[or waterway] and which is required by law to be registered for such use.

Option B: "Motor vehicle" means a device in, upon, or by which a person or property is or may be transported or drawn upon a highway [or waterway], except a device moved by human power or used exclusively upon stationary rails or tracks, and which is required by law to be registered for such use.]

Reporter's Notes: Option A is from the Model act. Option B is from the Uniform Motor Vehicle Certificate of Title and Anti-Theft Act. Reg. M deals with "motor vehicle leases" but the Reg. M Commentary expressly leaves the definition to state law. Is there a better generic definition somewhere?

The bracketed phrase "or waterway" is to flag the question whether these motor-vehicle provisions should extend to boat leases. If we decide to cover them, we should review this definition.

(9) "Open-end lease" means a lease in which the lessee's liability at the end of the lease term is based on the difference between the estimated residual value of the leased property and its realized value.

Reporter's Notes: Verbatim from Reg. M.

(10) "Periodic" means monthly, weekly, quarterly, or any other period as specified in the consumer lease.

(11) "Realized value" means the valuation of the leased goods at the termination of the lease, determined under Section 308.

Reporter's Notes: This refers to § 308 where various methods of calculating "realized value" are set out.

(12) "Rent charge" means the difference between the total of base periodic payments over the lease term minus the depreciation and any amortized amounts. [The term does not include any amount included in the {gross/adjusted} capitalized cost, or any delinquency, default, disposition, early termination, collection, or reinstatement charge. The term does not include any amount for taxes, registration, license, acquisition, administration, assignment and other fees, or charges for insurance, for accessories or their installation, for delivering, servicing, repairing or improving the vehicle and for other goods, benefits or services incidental to the lease, whether such amount is included in the capitalized cost, paid separately at lease inception by cash, check, credit card or similar means, or paid on a periodic basis in addition to the base lease payment.]

Reporter's Notes: This is comparable (but not identical) to the "finance charge" in credit transactions. The first sentence is verbatim the same as in Reg. M. The remainder, from the Model and several state laws, seems a helpful though possibly unnecessary amplification that is not inconsistent with (or preempted by) the federal definition.

(13) "Residual value" means

[Option A] the value of the leased property at the end of the lease term, as estimated or assigned at consummation by the lessor, used in calculating the base periodic payment.

Option B] the estimated value of the goods at the end of the scheduled lease term, used by the lessor in determining the base lease payment, as established by the lessor at the time the lessor and lessee enter into a lease.

Reporter's Notes: Option A is from Reg. M. Option B is from the Model act.

(14) "Single Payment Lease" means a consumer lease for which a single payment is required to be paid at the beginning of the lease for the scheduled term of the lease.

Section 303. Disclosure; Content and Form of Lease. [former 305]

(a) A lease must contain [or be accompanied by] the following information clearly and conspicuously, in a record:

(1) A designation of the lease as a "MOTOR VEHICLE LEASE," or words of similar specification, and a notice substantially as follows:

"NOTICE TO THE LESSEE: This is a lease. You have no ownership rights in the vehicle unless and until you exercise an option to purchase the vehicle, if this lease contains a purchase option. Do not sign this lease before you read it. You are entitled to a completed copy of this lease when you sign it."

(2) The place of business of the lessor, and the residence of the lessee [??];

(3) The disclosures required by Section 304 relating to insurance;

(4) The "Lease Rate," using that term, and a descriptive explanation such as "the cost of your lease as an annual rate";

(5) In the case of a lease that is a finance lease [UCC Art.§ 2A-103(1)(g)] a statement identifying express warranties or guarantees available to the lessee made by the supplier of the leased vehicle.

[(6) If the lease includes charges for goods or services provided by third parties, such as group credit insurance, service or maintenance contract or the like, a statement that the lessor may receive or retain a portion of those charges.]

(c) A lessee's signed acknowledgment of receipt of a copy of the lease is presumptive proof of delivery of the copy in an action or proceeding by or against a holder who took the lease without knowledge to the contrary.

Reporter's Notes: This section has been redone pursuant to drafting Committee instructions as of 2/97.

For vehicle leases this list adds to the disclosures required under Section 205 (primarily the federal Reg. M disclosures which Section 205 incorporates by reference). This section therefore need not repeat items required to be disclosed under Section 205.

Subsection (a)(1) combines the "caption" and "health warning" items that previously were (a)(1) and (a)(5). In light of developments in UCC Arts. 2, 2A, and 2B, I have begun using the term "record" to refer to both paper and electronic writings. The term is defined consistently with the UCC in Part 1 of this Act.

Subsection (a)(3) is a cross-reference to Section 305 on insurance. The modifications to earlier subsections (a)(3) and (a)(4), directed by the Drafting Committee, are included in Section 305.

Item (a)(4) leaves open the issue of whether a lease rate, generally comparable to the APR in credit transactions should be required. A Committee Task Force is reviewing that matter.

Re Subsection (a)(5): Reg. M requires disclosure of warranties made by the lessor or manufacturer, but not by the supplier of the vehicle in a finance lease, typically a car dealer. Supplier warranties in fact flow to the lessee under UCC § 2A-209, but that UCC section (and the definition of "finance lease" in UCC § 2A-103(1)(g) do not always require disclosure of them. This subsection is meant to fill that gap.

Item (a)(5) is the Reporter's notion, to address the somewhat contentious issue of upcharges. Does it help simply to tell the consumer that the lessor makes money on third-party charges? Cf.. Gibson v. Bob Watson Chevrolet Geo, Inc., 1997 WL 196704 (7th Cir. 1997)[distributed, 6'97]: held: under TILA, creditor misdisclosed extended warranty by showing whole amount paid to third-party when in fact creditor retained a portion.

Section 304. Insurance. [former 310]

(a)(1) With respect to liability insurance against personal injury or property damage caused to others, the lessor must disclose -

(A) the amounts and types of coverage the lessee is required to maintain;

(B) that the lessee may purchase the required insurance from an agent or broker of the lessee's choice subject to the lessor's right to reject that insurer for reasonable cause; and

(C) the premium [for the initial coverage period] for required or optional liability insurance [that] [if it] is purchased from or through the lessor.

(2) If liability insurance is not included in a lease, the lease must contain or be accompanied by a record statement substantially as follows:

No liability insurance coverage for bodily injury or property damage caused to others is provided under this lease. [Obtaining such insurance is the lessee's responsibility.]

(b)(1) With respect to casualty [physical damage?] insurance on the leased vehicle, the lessor must disclose -

(A) the amounts and types of coverage required

[, including any maximum deductible amounts];

(B) that the lessee may purchase the required insurance from an agent or broker of the lessee's choice subject to the lessor's right to reject that insurer for reasonable cause; and

(C) the premium [for the initial coverage period] for required or optional casualty insurance that is purchased from or through the lessor.

(2) If casualty insurance on the leased vehicle is not included in the lease, the lease must contain or be accompanied by a record statement substantially as follows:

No insurance coverage for physical damage to, or loss of, the leased vehicle is provided under this lease. [Obtaining such insurance is the lessee's responsibility.]

(3) If subsections (a)(2) and (b)(2) of this section are both applicable in a particular lease, the lease may include a single combined notice.

Reporter's Notes: Prior subsection (a), stating that insurance must be issued by an authorized company, is deleted per Committee instruction.

New subsections (a) and (b) respond to the Committee's suggestion [2/97] that disclosures about casualty and liability insurance be separated, and that we consider expanding the information given. As drafted here, the two subsections are almost verbatim the same. They call for information about the types of insurance the lessor may require, that the consumer may obtain the insurance on his own, and the cost of any insurance purchased from the lessor (including optional coverages included in the lease).

Vehicle leases almost always require the lessee to maintain casualty and liability insurance. Cf.., sample lease forms distributed earlier. Thus the "warning" notices in subsections (a)(2) and (b)(2) will usually apply in situations where the consumer elects to buy required insurance from another supplier, and the lessor or holder will usually demand evidence of such insurance. The warning, in this respect, reinforces the lessee's contract obligation to get the insurance. Q: is this an adequate justification for the warning? Note that the language (and intent) would require the warning even if the insurance were optional, i.e., not required.

(c)(1) If a lease includes group credit insurance the lessor must disclose -

(A) the term of insurance coverage and the premium for the initial period of coverage; and

(B) that the group credit insurance is not required.

(2) A lease may not be conditioned on the lessee's purchase of group credit insurance. A lessee's election to purchase group credit insurance is effective only if the lessee [signs or initials an affirmative written request for] [authenticates a record requesting] the insurance after receiving the disclosures specified in this subsection.

Reporter's Notes: Subsections (1) and (2) are based on the disclosure rules for credit insurance in Reg. Z § 226.4(d)(1), to assure that the voluntary nature of the insurance is clear to the lessee.

(d)(1) If liability, casualty, or group credit insurance is canceled [or terminated], a refund of unearned insurance premiums received by the holder must, at the holder's option, be:

(A) refunded to the lessee; or

(B) credited, together with the unearned portion of the rent charge applicable to the refunded premium, either to (i) the lessee's current obligation, (ii) the final maturing lease payments, or (iii) the lessee's obligation upon early or scheduled termination.

(2) No credit or refund need be made under this subsection if the amount would be

less than one dollar.

Reporter's Notes: As instructed by the Committee 2/97, this Subsection (d) combines former Subsections (b)(2) and (c)(3) to deal with refunds of unearned premiums of any kind of insurance all in one place.

Cf. NVLA comments re (d)(1)(B).

The question is who controls or is entitled to the refund? Since insurance included in the lease is usually financed as part of the capitalized cost, a cash refund to the lessee would be a windfall. This draft allows the holder to apply the refund in various ways (subject of course to the good faith standard). If it is held for future crediting, the holder must also credit the lessee with a rebate of unearned rent charges attributable to the refunded premium.

(e) If insurance in connection with a consumer lease is provided by or through the lessor, the lessor must provide or arrange to have provided to the lessee a copy of the policy or certificate of insurance.

Reporter's Notes: Drawn generally from the state acts. And see UCCC § 4.105. If the lessee is buying insurance through the lessor, the lessor should provide coverage information.

(f)(1) If a lessee fails to maintain insurance required under the lease, the holder may buy

[Option A: substitute insurance for substantially the same risks for either the interests of the lessee and the holder or the interest of either of them]

[Option B: other insurance that satisfies the lease requirements].

An amount paid by the holder for this insurance -

(A) is subject to a rent charge, as though that amount was part of the adjusted capitalized cost, from the date the holder notifies the lessee of the purchase of substitute insurance, and

(B) is subject to the repayment and default provisions of the consumer lease.

(2) Nothing in this subsection prevents the holder from pursuing any other remedy for default set forth in the consumer lease or provided by law.

Reporter's Notes: Modified to reflect drafting Committee instructions, 2/97.

Based on the Model and various state acts. This permits a holder to buy replacement coverage if the lessee lets insurance coverage lapse; it is an example of "advances to perform covenants" (cf. UCCC § 2.506). But force-placed insurance can be problematic: unduly narrow (or broad) coverages, high prices, lessor/seller upcharges, etc. Query: does this draft (either A or B) adequately deal with the overcharging problem?

Note that subsection (1)(A) imposes a de facto notice requirement: the holder cannot charge "interest" on the substitute insurance premium until the lessee is notified.

(g) A charge for insurance included in the lease or added to the lease obligation under subsection (f) may not exceed the premium actually imposed by the insurer for such insurance.

Reporter's Notes: Modified per Committee direction, 2/97.

This subsection puts an outside limit on the cost of insurance. The earlier, now-deleted "permitted by law" option would have allowed a lessor to charge the legal ceiling rate even though the particular insurer's charges may be lower, i.e., an upcharge. The "actually imposed" option restricts premiums to the insurer's actual charge; even here the lessor will likely realize commission revenues.

Section 305. Liability for Gap Amount on Total Loss of Vehicle. [former 312]

(a) In this section "gap amount" means the difference between (i) the amount that would be owed by the lessee if a total loss of the vehicle prior to the end of the lease term occasioned by its theft, physical damage or other occurrence, were considered an early termination of the lease, and (ii) the portion of the actual cash value of the vehicle actually received by the holder from the lessee's insurer or from any other person. The gap amount does not include the deductible amount applicable to an insurance policy maintained by the lessee, past due payments owed by the lessee at the time the holder receives the insurance proceeds, or any other amount due because of the lessee's delinquency or default [including excess mileage charges?].

(b) Except as provided in subsection (c), a lease may not provide that the lessee is responsible for the gap amount. A lease provision in violation of this subsection is unenforceable.

(c) Nothing in this Section precludes the holder from recovering the gap amount if [the holder establishes that] the total loss of the vehicle was occasioned by the lessee's fraud, intentional act, or [gross] negligence.

Reporter's Notes: Modified to reflect 2/97 Committee vote (7-0) to bar gap liability.

Proposed Comments:

1. When a leased vehicle is destroyed, stolen, or otherwise becomes a total loss during the term of the lease, this event constitutes a de facto early termination of the lease. Although insurance will usually cover all or most of the current market value of the vehicle, there is typically a "gap" between that sum and the amount due to terminate the lease at that point. The question is whether the lessee should be liable for that amount, and whether lessors should therefore be free to charge the lessee for contractual protection against that liability. Some vehicle leases have not imposed this gap liability on the consumer; instead the lessor protects itself through insurance or by absorbing these occasional losses internally. On the other hand, many other lessors have imposed this "gap liability" on the lessee, and used that as an opportunity to sell the consumer "gap liability waivers" or "gap protection."

2. Subsection (b) mandates the former approach. This means that the risk of gap losses would be absorbed and distributed through the holder's overall pricing structure, perhaps self-insured or covered by private insurance. With this restriction on gap liability, lessors lose the profit opportunity represented by sales of gap waivers, and would likely reflect the increased risk in their lease pricing. In a sense all lessees would pay a bit more to cover the occasional losses borne by lessors when vehicles suffer casualty. On the other hand, casualty loss of the vehicle can occur at any time during the lease term, including in the early months when the "gap" between value and payoff figures is the greatest. The lessee does not plan to give up the vehicle, and does not (once the vehicle is lost) have the option to continue with the lease. Under this provision, the lessee's insurance will pay the policy limits toward the value of the vehicle; and the lessee will pay the holder any deductible, but have no further liability under the lease. Lessees thereby avoid possibly large and unexpected liabilities for gap amounts that would be due if they had not purchased gap coverage. Lessors may minimize some of the gap risk by requiring lessees to maintain adequate casualty insurance.

3. A prohibition on gap liability after loss of the vehicle is consistent with the basic relationship between lessor and lessee. For leases generally (including both commercial and consumer leases) the lessor retains title to the goods, and bears the risk of loss. UCC § 2A-219(1). If the leased goods are destroyed without fault by the lessor or lessee, the lease contract is "avoided." UCC § 2A-221(a). This means neither party has any further claim against the other; the holder cannot seek further rent payments or other compensation from the lessee, nor does the lessee have a claim against the holder for nonperformance of the lease. Thus a lease provision that would impose gap liability on the lessee is an attempt at a contractual reallocation of the fundamental risk of loss in the lease. The judgement reflected in this section is that there is no justification for such a substantial reallocation in consumer leases.

4. Under subsection (a) the gap amount is measured by comparing two figures. One is the amount that the lessee would owe if the lease were considered to be terminated early, i.e., on the date of the loss. Cf.. Section 310(c)(3). The other figure is the amount the lessor or holder actually receives from the lessee's casualty insurer (or from a third party, such as a tortfeasor's liability insurer) as representing the cash value of the vehicle. The gap amount is the difference, and it is this liability that the lease cannot shift to the lessee. The lessee remains responsible to pay the holder the deductible amount of its insurance coverage, and any other payments or charges due under the lease that are unrelated to the loss of the vehicle (such as late or default charges). But the lessee cannot be required to make periodic lease payments beyond the date of loss of the vehicle.

5. Subsection (c) is the moral-hazard qualification. The general principle is that, although the basic risk of loss is the lessor's or holder's, rather than the lessee's, the lessor or holder has a claim against the person actually causing the loss. A lessee should not be able to avoid gap (i.e., early termination) liability by purposely destroying or "losing" the vehicle, or intentionally or negligently allowing its destruction or loss. The burden is on the holder to show fraudulent, intentional or [grossly ?] negligent conduct by the lessee. This contemplates misconduct by the lessee that would support an independent action in tort for damages for the destruction or loss of the vehicle. The lessee's liability insurance coverage may protect the lessee if, for example, lessee's negligent driving caused an accident. [Is this right? ]

Section 306. Lessee's Default; Right to Cure [former 315]

Option A:

(a) A lease may provide for events constituting default by the lessee. A holder may act on an event of default other than the lessee's failure to make a payment as required by the lease only if the holder has a good faith belief that such event significantly impairs its rights under the lease.

Option B [UCCC]:

(a) An agreement of the parties to a lease with respect to default on the part of the lessee is enforceable only to the extent that:

(1) the lessee fails to make a payment as required by the lease; or

(2) the prospect of payment, performance, or realization of the holder's interest in the vehicle is significantly impaired; the burden of establishing the prospect of significant impairment is on the holder.

Reporter's Notes: Option A is the Reporter's version. Option B is from UCCC § 5-109. Both options have the same objective: to put some restraint on assertions of default other than non-payment. Option A uses a good-faith belief test; Option B uses a prospect-of-impairment test.

(b)(1) After a lessee has been in default for 10 days solely by reason of failure to make a timely lease payment and any applicable late charge, the holder may send the lessee a notice of default. The notice of default must contain a conspicuous statement that the lessee is entitled to cure the default, set forth the dollar amount necessary to cure the default, the date by which the cure payment must be made and the name, address and telephone number of the holder from which information may be obtained regarding the cure. The date by which payment must be made may be no less than 20 days after the notice is sent. The holder may take no action to accelerate [?] [or collect] the lessee's obligation or repossess the vehicle until expiration of the period for cure stated in the notice.

(2) Until expiration of the period for cure stated in the notice under subsection (b)(1), the lessee may cure the default by tendering the amount of all unpaid sums due at the time of the tender, plus any unpaid delinquency or default charges, but without additional security deposit or prepayment of periodic lease payments not yet due. Cure restores the rights of holder and lessee under the lease as though the default had not occurred.

(3) A lessee is entitled to the right to cure under this subsection only once [in any 12 month period] during the term of the lease.

Reporter's Notes: Drawn from Model, NH, NJ, NY, MD acts. A more elaborate default/cure provision is in UCCC §§ 5.109, 5.110, 5.111. The right to cure is fairly standard fare where the consumer's default is a failure to pay; other defaults do not trigger cure rights.

Note that this is a pre-repossession cure right. A comparable post-repossession "reinstatement" right appears in the next section. Q., do we want one or the other (and which one), or both?

The details and timing of the mechanism are important to understand. The holder can take no collection or foreclosure action until 10 days after a payment is delinquent; this means 10 days after the nominal due date plus any grace period. The holder may then send a cure notice whenever it wishes -- immediately or later (perhaps only after a second missed payment). The cure notice sets a cure date, which must be no less than 20 days after sending and may be a longer time. If the lessee settles up by the due date, the lease is restored on its original terms, without penalty. If the lessee fails to cure, only then can the holder repossess or sue.

The UCCC limits the lessee to one cure over the term of the contract. Is there any reason in the lease setting to permit cure more often, such as once a year?

Section 307. Repossession; Reinstatement [former 316]

(a) Except as provided in Section 306, and unless the lessee voluntarily surrenders the leased vehicle to the holder, the holder may on default repossess the vehicle by judicial process or by self-help provided there is no breach of the peace.

Option A:

(b) (1) If at the time a holder takes possession of the vehicle the lessee has paid 60 percent of the gross capitalized cost of the vehicle, the lessee may cure a default consisting only of the failure to make a required payment and may reinstate the lease [without acceleration (?)] by tendering the unpaid amount of the lease obligation due at the time of tender, including charges for delinquency, default, or deferral.

(2) If the lessee is entitled to reinstate the lease under subsection (b)(1) of this Section, the holder must, within ___ days after repossession of the vehicle, give the lessee record notification of the right to reinstate, the amount the lessee must tender in order to reinstate the lease, and a date on or after which the holder may dispose of the vehicle.

(3) To be effective to reinstate a lease a tender of payment under subsection (b)(1) must be made before the later of:

(A) [21 ?] days after the holder sends the notification required by subsection (b)(2) of this Section; and

(B) the time the holder disposes of the vehicle or enters into a contract for its disposition under Section 309.

(4) A tender of payment under subsection (b)(1) restores to the lessee [and any cosigner] their respective rights as if the default had not occurred [and all payments had been made when scheduled], including the lessee's right to possession of the vehicle. Promptly upon the tender, the holder shall take all steps necessary to cause any judicial process affecting the vehicle to be vacated and any pending action based on the default to be dismissed.

(5) A lease may be reinstated under this subsection only once during its term.

(6) [The lessee's rights under this subsection may not be waived or varied by agreement.]

Option B:

(b) If the vehicle has not previously been repossessed under the lease, the holder must within ___ days after repossession give the lessee [written] [record] notice of the amount due in order to reinstate the lease and the time, place and manner at or after which the holder proposes to dispose of the vehicle. For this purpose the 'amount due in order to reinstate' is all amounts currently owed or in default under the lease (without acceleration) and the costs of repossession, and may include a reasonable additional security deposit for the reinstated lease. The notice must also state that on disposition of the vehicle the lessee will remain liable for any unpaid portion of the early termination liability. [The notice may also state an amount and payment terms for which the holder is willing to sell the vehicle in full satisfaction of the lessee's obligations under the lease.]

Reporter's Notes: The earlier draft of this section was based on the MD and NY acts.

In this version, Subsection (a) states the permissible methods of repossession: voluntary surrender, judicial process, or self-help.

Subsection (b) has two options. Both create a "cure" right similar to the pre-repossession cure right in the preceding section. Option A resembles the April 1997 draft revision of UCC Art. 9 (§ 9-622). Option B is the same as the earlier draft of this section. It requires a notice of default and intent to dispose of the vehicle, comparable to current UCC § 9-504(3). Presumably reinstatement will be a rare occurrence, as the lessee is almost by definition in serious financial trouble.

Industry opposes having both pre- and post-repossession cure rights. One or the other, they say, preferably post-repossession. A problem with post-repossession cure, however, is that it requires the holder to retain the vehicle through the cure period.

The Reporter suggests the parenthetical sentence in Option B as a way for the holder to broach a full-payoff, or purchase, figure. Does this help? (A lessee might find a buyer at that price.) Might it be made mandatory?

(c) Where a lessee is not entitled to reinstate under subsection (b), or if so entitled, does not do so by the date stated in the notice, the holder must apply the realized value of the vehicle, determined under Section 308, and any security deposit, in order, to --

(1) default charges and collection costs as provided for in the lease [Section 212];

(2) obligations of the lessee that are due or in default under the lease; and

(3) the early termination liability of the lessee.

Except as provided in Section 310(f), unless otherwise agreed the lessee is liable for any deficiency.

Reporter's Notes: This tracks the state acts and UCC Article 9 on how sale proceeds are to be applied. It assumes the lessee will be liable for a deficiency, the amount of which will be controlled by the early termination rules in Section 310.

The notion in the earlier draft that the lessee would be entitled to a "surplus" has been deleted.

Section 308. Determining Realized Value. [former 318-A]

(a) Realized value is a valuation of the vehicle at early or scheduled termination of the lease where the lessee does not have or does not exercise a purchase option. Realized value is:

(1) The price received by the holder for the leased vehicle at disposition;

(2) The highest offer for disposition of the vehicle; or

(3) Subject to subsection (b), the fair market value of the vehicle.

(b) A lessee and holder may, at the time of lease termination, agree on the fair market value of the vehicle and [unless unconscionable] the value so agreed upon is the realized value. [Such an agreed realized value is not unconscionable if the value is determined by an appraiser agreed to by the lessee, or by reference to a Blue Book or comparable reference source.]

Reporter's Notes: Redone at Committee instruction, 10/97. Basically tracks Reg. M, but with some amplification. Subsection (b) tries to provide a safe harbor.

Proposed Comments:

1. When terminated early (voluntarily or upon default), most vehicle leases measure the lessee's termination liability by reference to the then-value of the vehicle. The same is generally true at the scheduled expiration of an "open-end lease." This Section permits "realized value" to be measured in alternative ways. Subsection (a) substantively replicates the definition of "realized value" in the federal Regulation M.

2. Subsections (a)(1) and (a)(2) apply when the holder offers the vehicle for sale or re-lease. If the vehicle is disposed of in this manner, the price received is the realized value. If the disposition is by re-lease, it is the present value of rents plus the estimated residual value under that lease. If the holder receives offers but does not complete a disposition, the realized value is the highest such offer. As an alternative, under Subsection (a)(3), realized value may be measured by the fair market value of the vehicle, determined in any reasonable manner in the market in which the holder would otherwise dispose of the vehicle.

3. Subsection (b) relates to Subsection (a)(3), and permits "fair market value" to be set by agreement of the parties so long as the valuation is not unconscionable. The second sentence provides a safe harbor for the holder if the fair market value is based on an agreed appraisal or a standard price guide.

Section 309. Manner of Disposition of Vehicle on Termination of Lease [former 318-B]

(a) When the realized value that determines lessee's liability on early or scheduled termination of the lease is determined under Section 308(a)(1), the disposition may be by public or private sale or re-lease, at any time and place, and on any terms, but every aspect of the disposition including the method, manner, time, place [, amount of proceeds,] and other terms must be commercially reasonable. The holder may buy at any public sale.

(b) If the purchaser is the holder, an affiliate of the holder, or a [secondary obligor] [person obligated to the holder under a recourse, warranty or similar agreement] the sale or disposition satisfies this Section only if the amount of proceeds is commercially reasonable.

Reporter's Notes: . This section addresses the standards for a proper sale or other disposition of the vehicle by the holder. This would apply to dispositions after default and repossession, after voluntary early terminations, and also at the scheduled termination of an open-end lease.

In subsection (a), the basic standard is "commercial reasonableness," as under UCC Art. 9. The words "amount of proceeds" are from the 4/96 revision draft of § 9-610(b); if included, "amount of proceeds" would have to be commercially reasonable in all cases (not just insider sales).

Subsection (b) address the issue of "insider" sales, often at reduced prices. One approach (in the earlier draft) is to say that a sale to the holder or a related or recourse party just doesn't count; it is the next sale that measures realized value. The approach in this Subsection (b) is basically the same as what is included in proposed UCC 9-610(b); the insider sale is OK if the proceeds are adequate. If this alternative is used, the words "amount of proceeds" probably should be deleted from subsection (a).

Proposed Comments:

1. The standards applicable to the disposition of the vehicle on lease termination track those under UCC Articles 2A and 9. The holder has flexibility as to when and how the disposition will occur, but all aspects of it must be commercially reasonable. [This includes the amount of proceeds received, the reasonableness of which may depend on the condition of the vehicle as well as prevailing market prices.] If the realized value of the vehicle is determined under Section 317(a)(3)[fair market value], the holder has no responsibility under this section with respect to any ultimate disposition of the vehicle.

2. (If reinstatement is retained in Section 316(b):) Since the lessee accrues no equity in the leased vehicle, there is no right of redemption as such, and thus no need for notice to the lessee to preserve that right. But where the lessee is entitled to reinstate the lease under Section 316, the lessee will receive a comparable notice concerning the right to reinstate.

Section 310. Early Termination Liability. [former 319]

(a) If a lease is terminated early by mutual agreement of the holder and lessee, and the lessee is not otherwise in default under the lease, the holder may not report the early termination to a consumer reporting agency as a default unless the lessee fails to satisfy the lessee's obligations under the lease within the time periods provided in the lease.

Reporter's Notes: By Committee instruction [10/97] this section no longer attempts to specify when early termination is permissible. This is left to the lease agreement. Thus a lease might prohibit ET altogether, or permit ET only on specified circumstances, e.g., if lessee buys the car.

(b) A lease may provide a measure or formula for the lessee's liability on early termination, but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the early termination, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. An early termination charge is separate from and does not include charges accrued under the lease such as: unpaid periodic lease payments through the date of early termination, or late, delinquency or default charges and other unpaid amounts for which the lessee is responsible under the lease.

Reporter's Notes: The structure of this subsection has been changed. The new second sentence takes delinquent or already accrued payments out of the early termination charge, where they don't really belong. They are due and payable regardless of early termination. (Also, leaving them in complicates the use of the phrase "early termination charge" elsewhere in the Act, e.g., § 305 on gap liability, and subjects those accrued obligations to the "reasonableness" standard of this section.)

(c) An early termination charge is [presumed to be] reasonable under subsection (b) of this Section if it does not exceed an amount equal to the sum of:

Reporter's Notes: Are we certain that this subsection is really needed, or is helpful? The basic test is reasonableness in light of the specified factors. This subsection identifies components of the ETC, but does not cap them in dollar terms, so lessors can charge whatever they want and defend it as reasonable. Is this really any kind of consumer protection or lessor safe harbor?

(1) official fees and taxes imposed in connection with lease termination:

(2) either

(A) a disposition fee in an amount set forth in the lease [but only if payable at both early and scheduled termination ?], or [and]

(B) [if the vehicle was foreclosed after default pursuant to Section 3,] the actual and reasonable costs of retaking, storing, preparing for sale and disposing of the goods [to the extent those costs exceed the amount of the disposition fee];

Reporter's Notes: The Model act states (2)(A) and (2)(B) as two separate components, although it seems they cover essentially the same costs. The parentheticals in (B) suggest how it can be applied cumulatively to (A): repossession costs may exceed the "routine" disposition fee; if so the excess cost is recoverable as well as the fee.

Query: should a disposition fee on early termination be permitted only if it is also charged at expiration of the lease? The holder's "disposition" burden is the same in either case.

(3) the amount, if any, by which (A) the balance subject to rent charge plus the rent charge earned in advance for the computational period in which the early termination occurs [???], calculated in accordance with the constant yield method [or any other generally accepted actuarial method ??] exceeds (B) the realized value of the vehicle; and

Reporter's Notes: This is based on the Model and other state acts, and is the heart of early termination liability. It allows the holder to collect the unamortized adjusted capitalized cost (in credit terms, the unpaid principal balance). The "constant yield method" is essentially a simple interest calculation, except that rent payments are due at the beginning of the month rather than at the end.

Q: What is the rationale and basis for considering lease payments earned at beginning of month? One apparent effect, in the formula stated here, is that the lessee seemingly owes a whole month's rent charge regardless of when during the month he/she terminates the lease.

The bracketed language would seem to approve other amortization methods, such as "Rule of 78s" and "straight line" formulas which are less generous in determining the payoff figure. Do we want to prohibit expressly use of these alternative methods? Or limit the circumstances in which they can be used. E.g., federal law (15 USC 1615) bars use of Rule of 78s in precomputed transactions longer than 61 months; UCCC § 2-510 similarly prohibits Rule of 78s in transactions longer than 48 months.

Keep in mind that the new Reg. M disclosure about early termination is a very summary one (a "description of the method," e.g., "constant yield method") plus a "health warning" about a possible "substantial charge if you end this lease early." Thus consumers are not likely to comprehend from the disclosures the dollar effects of different payoff formulas.

(4) any other early termination charge disclosed in the lease.

Reporter's Notes: From the Model and other state acts. This would appear to permit unlimited prepayment penalties. But the whole formula remains subject to the "reasonableness" standard. Is that enough constraint?

N.B. Former subsection (d) re permissibility of alternative computation methods is deleted as unnecessary.

(d) If a lessee demonstrates that the holder has violated Section 307 [Repossession; Reinstatement] or Section 309 [Manner of Disposition of Vehicle on Termination of Lease], there is a rebuttable presumption that the realized value equals the amount authorized under subsection (c)(3) of this Section. The holder may rebut this presumption by [clear and convincing] proof that notwithstanding the violation the reasonably determined value of the vehicle is less than the total of the amounts authorized under those paragraphs.

Reporter's Notes: This is perhaps imperfect language to raise the question whether the holder loses its rights to any "deficiency" -- the rest of the lessee's early termination obligation -- if the holder mis-conducts the repossession or disposition of the vehicle. This has been a controversial topic under UCC Article 9: the April 1997 revision draft of Article 9 [§ 9-625] contains two alternatives, one an "absolute bar rule, and the other a "rebuttable presumption" approach (which is what this draft reflects). UCCC § 5.103 bars a deficiency claim altogether unless the creditor acts in good faith and in a commercially reasonable manner.

In leases, disposition of the vehicle on early termination almost inevitably leaves a "deficiency" in the early termination liability. The question is whether a holder should forfeit this recovery on account of improper conduct of the repossession or disposition. Cf. NVLA comments [12/97].

Proposed Comments:

1. Vehicle leases are generally written to bind the lessee for the full term of the lease. Some leases end in default and repossession, and are terminated early for that reason. In addition, many lessors will agree to an early termination of the lease, often to facilitate the lessee's buying or leasing a new vehicle. In effect the holder waives the lessee's technical default. Subsection (a) recognizes this reality. In such a case of agreed-to early termination, assuming the lessee is not otherwise in default, the holder may not report the early lease termination as a default or equivalent "derogatory" to a credit reporting agency if the lessee settles all obligations under the lease in a timely fashion.

2. Subsection (b) replicates § 183(b) of the federal Consumer Leasing Act which puts these substantive limits on early termination formulas, thus adopting the federal standard for all vehicle leases subject to this Act. The CLA in effect authorizes "liquidated damages" formulas in consumer leases, as does UCC § 2A-504(1). This is in lieu of requiring a complex calculation based on common law or UCC § 2A-528, which states a lessor's basic measure of damages for lessee default. That Art. 2A measure is essentially the current value of the lessor's expectancy under the lease. The "reasonableness" of an early termination formula, therefore, is ultimately measured by reference to that underlying measure of damages. This Act uses the liquidated damages language of the federal act, rather than UCC § 2A-504(1), out of deference to the possibly preemptive effect of that federal statute if it were interpreted differently from the UCC provision.

The second sentence of subsection (b) clarifies that overdue periodic lease payments, late charges or other charges accrued under the lease are not part of the early termination charge. Those charges are due and payable regardless of the early termination, and remain so.

3. The test is whether the aggregate early termination charge is reasonable in light of the stated factors. Leases may categorize early termination charge components in various ways. Thus individual elements of an early termination charge should not be assessed in isolation; rather it is the lessee's total obligation that must be reasonable. This test also recognizes that in the often fast-paced and high volume consumer leasing markets (including securitizations) it is important for holders to be able to clear their books of terminated leases without undue complexity or delay, and that an early termination formula may properly reflect this objective.

4. Unlike usury laws, this Act does not regulate the amounts or manner of calculation of rents and related charges in consumer leases, and it is therefore not feasible to set precise limits or formulas for calculating a maximum permissible "payoff" figure when a lease is terminated early. The test remains whether the early termination charge provided in the lease is reasonable as a form of liquidated damages. Subsection (c) enumerates the most likely categories of "payoff" components, and provides a limited safe harbor for a lessor who computes the early termination charge in terms of those categories. Paragraph (1) refers to specific charges related to terminating the lease and payable to third parties. Paragraph (2) allows recovery of a fixed disposition fee (generally related to the expense of retaking, storing and disposing of the vehicle), and also any additional actual costs expended in repossessing and foreclosing after default. Thus, a lease might provide a uniform "disposition" fee in a sum certain, regardless how or when the vehicle is returned to the holder. And if the lease so provides [Section 212(c)], the holder may also recover a sum equal to actual out-of-pocket expenses in excess of the disposition fee where involuntary repossession is necessary.

5. Subsection (c)(3) permits inclusion in the early termination charge of a sum comparable to the unpaid principal balance in a prepaid credit transaction. Part of each of the lessee's scheduled rental payments is attributable to depreciation, i.e., reducing the "adjusted capitalized cost" [Reg. M § 213.4(f)(3)], and part is attributable to the time-value of the lessee's right to defer payments for the use (depreciated value) of the vehicle. This latter component is the "rent charge" [Reg. M § 213.4(f)(6)], which reflects an implicit interest rate structured into the lease. Together, the portions of "base periodic payments"covering depreciation plus the "rent charge" amortize the adjusted capitalized cost down to the residual value over the term of the lease. When a lease is terminated early, fixing the lessee's payoff obligation involves aggregating the unpaid adjusted capitalized cost plus rent charges accrued to the time of termination, but not any rent charges thereafter. (The analogue in credit transactions is the distinction between earned and unearned interest.) This sum is then reduced by the realized value of the vehicle [Section 308]. Subsection (c) (3) contemplates that the early termination charge will make this rent charge adjustment by applying a generally accepted principal reduction formula to determine what is the remaining unpaid adjusted capitalized cost. The calculation method is "generally accepted" if it is commonly used in the consumer leasing markets and is not otherwise unlawful. Actuarial calculations are generally the most favorable to consumers, [but sum-of-the-digits, straight-line, and other variations may also be used.] The lease of course must disclose the early termination charge methodology in accordance with Reg. M § 213.4(g).

The balance owing under this Item (5) is sometimes referred to as the lessee's "gap liability." This is similar to, but separate from, the "Liability for Gap Amount" treated in Section 305 of this Act.

6. Subsection (c)(4) acknowledges that other early termination charge components may be provided for in the lease. In combination with Items (1) through (3), the imposition of any such additional charge must assure that the total early termination charge remains reasonable.

7. Subsection (d) provides an incentive for holders to conduct repossessions and foreclosures strictly in accordance with Sections 307 and 309, by analogy to the limitations on deficiency judgments under UCC Article 9. If the holder is proved to have acted improperly, there is presumptively no "gap liability" for the lessee under subsection (c)(3). The holder may rebut this presumption only by establishing factually that the vehicle is worth less than the amount in Item (3).

Section 311. Excess Wear and Use; Excess Mileage. [former 320]

(a) A lease may set standards for excess wear and use of the leased vehicle and impose liability on the lessee for such excess wear and use. The standards and amounts of liability must be reasonably designed and applied to compensate the holder for actual unanticipated diminished value of the vehicle due to damage, overuse, or lack of maintenance, including the actual costs of repair and refurbishing, and may not subject the lessee to liability for ordinary and expected wear, use and depreciation of the vehicle.

(b) (1) If on lease termination the holder seeks to impose excess wear and use charges on the lessee, it must provide the lessee:

(A) Reasonable [record ?] notice of the nature and amount of such charges; notice is reasonable if given within [ten] days after termination of the lease.

(B) Reasonable time and opportunity for the lessee or any other person designated by the lessee to examine the vehicle, and access to the vehicle for that purpose; the time is reasonable if it is no less than ___ days after the holder sends the notice under paragraph (1);

(C) an opportunity for [Option A: reinspection within ___ days after the holder sends the notice under paragraph (a)(1) by] [Option B: prompt resolution of any dispute through] an independent inspector agreeable to holder and lessee [, or through non-judicial dispute resolution procedures].

Reporter's Notes: Pursuant to Committee suggestions [10/97], alternative language suggested for baseline lessee rights. Is reinspection opportunity enough? What is a workable "opportunity for...prompt resolution"?

(2) If [within] [no more than] ___ days prior to termination of the lease the lessee has the vehicle inspected for excess wear and use by the holder or an inspector designated by the holder, the holder need not comply with subsection (b)(1) of this section if, within (3 ?) days after the inspection, the holder advises [notifies] the lessee of the nature and amount of excess wear and use charges and that

(A) the lessee is entitled to a binding reinspection at the lessee's expense by an independent inspector agreed to by the lessee and holder;

(B) the lessee is entitled to have necessary repairs made at the lessee's own expense; and

(C) lessee remains liable for excess wear and use incurred after the inspection and before termination of the lease.

(3) Notwithstanding subsections (b)(1) and (b)(2) of this section, a lessee remains liable for excess wear and use that was not reasonably detectable at the time of the holder's inspection or the reinspection under paragraphs (b)(1)(C) or (b)(2)(A) of this Section.

(c) A lease may provide for the imposition of a charge for excess mileage. Such a charge must be reasonable in light of the expected diminution in value of the vehicle on account of the excess mileage.

Reporter's Notes: This version is new, pursuant to Committee instructions, 10/97. It is a relatively"light" version of a limitation on EWU charges. It does not burden the parties with a very detailed choreography of who does what in what order. Rather, it concentrates on essential protections: notice, access & a chance for reinspection, and a mechanism for speedy dispute resolution. As a practical matter, the holder will usually want to liquidate the vehicle promptly, and it seems unwise to build elaborate structures for sorting out EWU disputes that would involve inordinate delay.

Subsection (b)(2) is new, pursuant to Committee instruction. It tries to give lessees and lessors some incentive to inspect for excess wear and use before lease termination. I'm not sure how much real incentive there is or can be.

Section 312. [Open-End Lease] (defined in § 302) [former 321]

Option A:

A lessor may not offer or consummate an open-end lease.

Option B:

(a) The obligation of a lessee upon expiration of an open-end lease may not exceed twice [three times] the average payment allocable to a monthly period under the lease. This limitation does not apply to charges for [damage] [excess wear and use or excess mileage] or for other default.

(b) If the realized value of the vehicle at the expiration of an open-end lease exceeds the estimated residual value, the lessee is entitled to the surplus.

Option C:

(a) In an open-end lease [where the lessee's total obligation (excluding residual value) is no more than $25,000], there is a rebuttable presumption that, at the end of the lease term, the residual value of the leased property is unreasonable and not in good faith to the extent that the residual value exceeds the realized value by more than three times the base monthly payment (or more than three times the average payment allocable to a monthly period, if the lease calls for periodic payments other than monthly); the holder cannot collect the excess amount unless the holder brings a successful court action and pays the lessee's reasonable attorney's fees, or unless the excess is due to unreasonable or excessive wear or use of the leased property (in which case the rebuttable presumption does not apply).

(c) Notwithstanding subsections (a) and (b) of this Section, a lessee and holder are permitted, after termination of the lease, to make any mutually agreeable final adjustment regarding excess liability.

Reporter's Notes: "Open-end lease" refers to one where the lessee's obligation at expiration depends on the realized value of the vehicle at that time. The lessee cannot simply return the car, but rather must bear some or all of the depreciation risk.

Option A would flat-out prohibit open-end leases, justified on the ground that there is too much risk that the consumer will be stuck with a large balloon obligation.

Option B is almost verbatim from UCCC § 3.401. It restricts the consumer's liability to two monthly payments. Lessors may argue this unduly increases their risk in open-end leases.

Option C is almost verbatim from Reg. M § 213.4(m)(2) and (3), which are in turn drawn from CLA § 183(a). The federal Act effectively restricts the lessee's liability under an open-end lease to an amount no greater than three monthly payments, but does it through a complicated "presumption" mechanism. Several states (CA, NH) restate this substantive limitation in their leasing acts. The bracketed language would limit this restrictive provision to leases up to $25,000, the same as the federal Act.

There is a wrinkle here. Section 205 of this Act requires that all leases, up to $150,000, make the disclosures required by Reg. M. That regulation handles these special open-end rules with a disclosed presumption limiting liability to three monthly payments. Thus any open-end lessor must make Reg. M disclosures with its restrictions. It would seem incongruous to put in this Act Option B [flat limitation], or Option C [limited to smaller leases]; the lessor would be disclosing one thing to satisfy Section 205 but this Section would be imposing a different limitation.

Unless we wish to outlaw open-end leases (Option A), I suggest we delete this section in its entirety as unnecessary. Let Reg. M take care of it for all sizes of open-end leases.

[Section 313. Calculation of Lease Rate.] [former 322]

Reporter's Notes. No text proposed at this time. If the Committee determines to require disclosure of a Lease Rate, this section would set out the computational formula.

[With experience and the passage of time it may become appropriate to add provisions dealing with discrete forms of consumer leases other than those involving motor vehicles. The Conference does not recommend such provisions at this time.]

Reporter's Notes: This merely leaves a logical place in the Act to expand its coverage to other kinds of consumer leases at some future time.

Section 501. Private Remedies

Reporter's Notes: This section generally resembles the civil liability section of the Truth in Lending Act [§ 130] (which applies to violations of the federal CLA), and UCCC §§ 5.201 and 5.203. The focus is on liability for violating this Act; remedies for contractual breaches of the lease are covered in UCC Article 2A.

The objective here is give lessees incentives to police lessor/holder misconduct, primarily through recovery of actual and statutory damages and court costs and attorney's fees. It is not intended to create a minefield of potential liability for the leasing industry. Thus the effectiveness, and fairness, of these civil liability rules depends on the clarity and precision of compliance responsibilities stated throughout this Act.

(a) (1) A lessee who has suffered a loss due to a violation of any provision of this Act by a lessor or holder is entitled to recover the lessee's actual [direct and consequential] damages from the holder that committed the violation.

(2) Whether a lessee [person ??]seeks or is entitled to damages or has an adequate remedy at law, the lessee [person ??] may bring an action to:

(A) obtain a declaratory judgment that an act or practice violates this Act; or

(B) enjoin, in accordance with principles of equity, a lessor or holder who has violated, is violating, or is otherwise likely to violate this Act.

Reporter's Notes: This subsection (2) is new, in response to Committee instruction [10/97]. It allows declaratory and injunctive relief, as well as money damages.

(b) Except as otherwise provided in this Section, and in addition to recovery of actual damages under subsection (a)(1), in an action in which it is determined that a holder has violated any of the following provisions of this Act,

Reporter's Notes: Options A and B are different ways of setting statutory damages: either a flat dollar amount, or some proportion of the lease obligation.

The sections listed below are those that include explicit and fairly precise requirements for lessors and holders. For violations of other sections, the lessee would be limited to actual damages.

Sec. 203 [Rebate or Discount for Referrals]

Sec. 205 [Disclosure; Form of Lease Document]

Sec. 206 [Co-Signer Notice]

Sec.207 [Information During Lease Term]

Sec.208 [Renegotiations and Extensions]

Sec. 210 [Prohibited Lease Terms]

Sec. 212 [Delinquency and Default Charges]

Sec. 303 [Disclosure; Content and Form of Lease Document]

Sec. 306 [Lessee's Default; Right to Cure]

Sec. 307 [Repossession; Reinstatement]

(1) in an individual action the lessee is entitled to an award of statutory damages of [Option A] $_____ [Option B] the greater of $____ or the amount of [#] periodic payments provided for in the lease; and

(2) (A) In a class action, the lessees are entitled to an award of statutory damages in such amount as the court may allow, except that as to each member of the class no minimum recovery is applicable, and the total recovery under this paragraph in any class action or series of class actions arising out of the same failure to comply by the same holder may not be more than the lesser of $500,000 or 1 per centum of the net worth of the holder that committed the violation.

(B) In determining the amount of award in any class action, the court shall consider, among other relevant factors, the amount of any actual damages awarded, the frequency and persistence of failures of compliance by the holder, the resources of the holder, the number of lessees adversely affected, and the extent to which the holder's failure of compliance was intentional.

(c) In a successful action under subsections (a) or (b)of this Section, a lessee is also entitled to the costs of the action and reasonable attorney's fees as determined by the court. In determining the award of attorney's fees, the amount of the lessee's recovery is not controlling.

(d) A holder has no liability under this Section if, within [60 ?] days after discovering [learning of (?)] a violation of this Act, [and prior to the institution of an action under this Section or the receipt of written notice of the violation from the lessee], the holder notifies the lessee concerned and corrects the violation(s) [including refund, restitution or crediting of any charges improperly disclosed or imposed].

(e) A holder is not liable for a violation of this Act if the holder shows by a preponderance of evidence that the violation was unintentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error. Examples of bona fide errors include, but are not limited to, clerical errors, calculation errors, computer malfunctions and programming errors, except that an error of legal judgment with respect to a holder's obligations under this Act is not a bona fide error.

(f) When there are multiple lessees in a consumer lease, there shall be no more than one recovery of statutory damages under subsection (b)(2) of this Section.

(g)(1) An action under this Section may be brought within [one/two]? years from the date of the occurrence of the violation which is the subject of the action. For this purpose an action is "brought"--

(A) when a lessee initiates an action against a holder; or

(B) when a lessee raises a violation of this Act as a defense or counterclaim in an action initiated against the lessee (including proceedings in insolvency).

(2) Option A: This subsection does not bar a lessee from asserting a violation of this Act in an action by a holder to collect obligations under the lease which was brought more than ___ years from the date of the occurrence of the violation as a matter of defense by recoupment or set-off in such action.

Option B: Damages to which a lessee is entitled pursuant to this Section may be set off against the lessee's obligation, and may be raised as a defense to an action on the lease without regard to the time limitations prescribed by subsection (g)(1) of this Section.

Reporter's Notes: Modified pursuant to Committee instruction [10/97]. Option A is from federal Truth in Lending law (applicable to Consumer Leasing Act chapter). Option B is from UCCC § 5.202. Core question is how long and how tight should the statute of limitations be? Both the federal CLA and the UCCC have basically a 1-year SOL, but permit "recoupment" counterclaims beyond that point.

(h) No liability arises under this Section with respect to any act done or omitted in good faith in conformity with any rule, regulation or interpretation of this Act, or in conformity with any approval, by [Attorney General or other enforcement authority under § 505] notwithstanding that after such act or omission has occurred, such rule, regulation, interpretation or approval is amended, rescinded, or determined by judicial or other authority to be invalid for any reason. (i) The multiple failure to disclose to a lessee any information required to be disclosed under this Act entitles the lessee to a single recovery under this Section but continued failure to disclose after a recovery has been granted gives rise to rights to additional recoveries.

(j) A lessee may not take any action to offset any amount for which a holder is potentially liable to the lessee under subsection (b) of this Section against any amount owed by the lessee, unless the amount of the holder's liability under subsection (b) has been determined by judgment of a court of competent jurisdiction in an action to which the lessee was a party. This subsection does not bar a lessee then in default under the lease from asserting a violation of this Act as an original action, or as a defense or counterclaim to an action brought by a holder to collect amounts owed by the lessee.

(k) Notwithstanding the provisions of Section 213 of this Act, and except where the assignment is involuntary, a civil action for a violation of this Act which may be brought against a holder may be maintained against a subsequent holder only if the violation is apparent on the face of the consumer lease. For purposes of this subsection, a violation is apparent on the face of the consumer lease if:

(1) a required disclosure [is omitted or] can be determined to be incomplete or inaccurate from the face of the consumer lease or other documents assigned; or

(2) the consumer lease contains a prohibited provision or does not contain the notices, legend or items required by this Act.

Reporter's Notes: This insulates a subsequent assignee from liability under this section for any violation committed by a prior holder which the current holder could not identify from the lease documentation.

Section 502. Effect of Violation on Rights of Parties; Election of Remedies.

(a) (1) Except as otherwise specifically provided in this Act, a violation of this Act by a holder does not impair the holder's rights on the lease.

(2) If it is determined that a holder has violated Sections ___, ___, ___ , the lessee may rescind the lease and recover all payments made by surrendering the leased goods and paying the fair market value for any use the lessee has made of the goods.

(b) If an action or omission that violates this Act also violates other law, the lessee is entitled to but a single remedy.

Reporter's Notes: This is the Reporter's proposal. Subsection (a)(1) is to make clear that a violation of this Act does not nullify or undercut the lessee's obligation on the lease. Cf.. UCCC § 5.201(4).

Subsection (a)(2) is new [10/97]. Might certain violations be so serious as to justify canceling the lease. (Which violations?) If so, the lessee ought to be expected to surrender the goods and pay for whatever use of them he/she has gotten. This is roughly analogous to rescission rights under TILA.

Subsection (b) is to prevent multiple recoveries for the same violation. Cf. UCCC § 5.203(8).

Section 503. Administrative Enforcement.

The provisions of this Act shall be enforced by the [Attorney General, Credit Code Administrator, or similar public agency]. For this purpose the [Attorney General, Credit Code Administrator, or similar public agency] shall have the powers and remedies provided in the [state UDAP act].

Reporter's Notes: This section would assign enforcement authority to a public agency, presumably one that has investigative, cease-and-desist, and similar powers. That agency would have the same enforcement powers as under the state UDAP Act or similar consumer fraud act.

Section 504. Administration of Act.

(a) The [designate public official or office] shall administer the provisions of this Act, and shall have the authority to issue rules, regulations, interpretations or approvals designed to effectuate the consumer protection purposes of this Act, to prevent circumvention or evasion thereof, to facilitate compliance therewith, and to assure consistent interpretations with those of other states enacting this uniform Act.]

(b) Rules, regulations, interpretations or approvals pursuant to this Section shall be promulgated in accordance with [appropriate state administrative procedure act].

Reporter's Notes. There was a suggestion [10/97] to bracket this whole section to indicate it is an option for the states to enact. But my notes say this was withdrawn.

Is there need for an Administrator for this Act? Is it wise to permit regulations and interpretations beyond the text of the statute, when this might lead to non-uniform interpretations of the Act? On the other hand, if exhorted to maintain uniform interpretations, the Administrator may provide useful guidance to lessors. Note that Section 501(h) would protect lessors from liability if they follow such administrative guidance.

Section 601. Purposes; Rules of Construction.

(a) This Act shall be liberally construed and applied to promote its underlying purposes and policies.

(b) The underlying purposes and policies of this Act are:

(1) to simplify, clarify, and modernize the law governing the leasing of consumer goods;

(2) to recognize the unique characteristics and legitimate role of leasing in the marketing of consumer goods;

(3) to further consumer understanding of the terms of lease transactions and to foster competition among suppliers of consumer leases so that consumers may lease goods at reasonable cost;

(4) to protect consumers against unfair practices by some suppliers of consumer leases, having due regard for the interests of legitimate and scrupulous lessors;

(5) to permit and encourage the development of fair and economically sound consumer leasing practices;

(6) to conform the regulation of disclosure in consumer lease transactions to the federal Consumer Leasing Act; and

(7) to make uniform the law, including administrative rules, among the various jurisdictions.

Reporter's Notes: Based on UCCC § 1.102. Paragraph (2)(b) is proposed new language, to replace a UCCC reference to setting rate ceilings.

This whole section may be outside current Conference style guidelines!

Section 602. Construction Against Implicit Repeal.

This Act being a general act intended as a unified coverage of its subject matter, no part of it shall be construed to be impliedly repealed by subsequent legislation if that construction can reasonably be avoided.

Reporter's Notes: Boilerplate. Same as UCCC § 1.104.

Section 603. Severability.

If any provision of this Act or the application thereof to any person or circumstance is held invalid, the invalidity does not affect other provisions or applications of this Act which can be given effect without the invalid provision or application, and to this end the provisions of this Act are severable.

Reporter's Notes: Boilerplate. Same as UCCC § 1.105.

Section 604. Effective Date; Transition.

(a) This Act takes effect at 12:01 a.m. on [ ].

(b) A transaction entered into before this Act takes effect and the rights, duties and interests flowing from it thereafter may be terminated, completed, consummated or enforced as required or permitted by any statute, rule of law, or other law amended, repealed, or modified by this Act as though the repeal, amendment, or modification had not occurred; but this Act applies to

(1) a renegotiation made after this Act takes effect as to a lease whenever entered into;

(b) a lease entered into before this Act takes effect insofar as the remedies of holders are limited by Sections 210 [Prohibited lease terms], 306 [Lessee's default; right to cure], 307 [Repossession; reinstatement], and 309 [Manner of Disposition of Vehicle on Termination of Lease].

Reporter's Notes: Based on UCCC § 9.101. This changes certain terms and groundrules for enforcement of existing leasesQ: Is this constitutional? Is it fair?

Section 605. Specific Repealer and Amendments.

(1) The following acts and parts of acts are repealed:

(a)

(b)

(2) The following acts and parts of acts are amended:

(a)

(b)

Reporter's Notes: Based on UCCC § 9.103. As this Act is meant as fairly comprehensive coverage of consumer leases, it would be necessary to identify existing state statutes that deal with consumer leases and repeal or amend them as appropriate.