Finance Leases Under Article 2A: The Hell-or-High-Water Rule
When attorneys structure equipment financing, the choice between a secured loan and a finance lease is often driven by accounting, tax, and bankruptcy considerations. Many overlook a critical feature of finance leases under UCC Article 2A: once the lessee accepts the goods, its payment obligation becomes irrevocable and independent—regardless of what the supplier does or fails to do after delivery.
The Rule
California Commercial Code § 10407 codifies the hell-or-high-water rule for finance leases. Once a finance lessee accepts the goods, the lessee’s promises under the lease become irrevocable and independent. The lessee must continue making rent payments even if the goods fail to perform, the supplier becomes insolvent, or the supplier breaches warranties. The lessee’s sole remedy for supplier failures runs directly against the supplier—not the lessor or finance company.
A “finance lease” under § 10103 requires three conditions: (1) the lessor does not select, manufacture, or supply the goods; (2) the lessor acquires the goods or the right to possession and use in connection with the lease; and (3) before signing, the lessee receives a copy of the supply contract or is informed in writing of the supplier’s warranties. If any condition is not satisfied, the transaction is an ordinary Article 2A lease and the lessee retains standard rights to withhold rent for lessor breaches.
The finance lease structure reflects economic reality: the finance company is functionally a lender, not a supplier. It has no involvement in selecting, manufacturing, or warranting the equipment. Requiring the finance company to bear product performance risk would eliminate equipment securitization and substantially raise the cost of equipment financing.
What This Means in Practice
Attorneys encounter the hell-or-high-water rule in three settings. In transactional work, the finance lease structure is deliberate—it allows the lessor to assign rent streams as near-unconditional receivables. Lease agreements typically contain an explicit hell-or-high-water clause reaffirming § 10407 obligations, often in conspicuous type to satisfy notice requirements. In acquisition due diligence, finance lease obligations must be treated like fixed debt service: the company cannot reduce or suspend payments even if leased equipment underperforms or becomes obsolete. In lessee counseling, the key message is that warranty claims survive but run against the supplier directly under California Commercial Code § 10209, which passes through supplier warranties to the finance lessee by operation of law.
Practitioner Takeaway
Before a client enters a finance lease, confirm that they understand acceptance of the goods triggers an irrevocable payment obligation. Counsel lessees to thoroughly inspect equipment before acceptance, to negotiate the supply contract directly with the supplier—since that is where warranty remedies live—and to understand that a warranty claim against the supplier does not excuse rent payments to the finance company. For lessor-side work, verify the three statutory conditions under § 10103 are satisfied to preserve the hell-or-high-water structure. If even one condition fails, the rent stream loses its unconditional character and its value as a securitization asset collapses.