(1) If a lessor fails to deliver the goods in conformity to the lease contract (Section 55-2A-509 NMSA 1978) or repudiates the lease contract (Section 55-2A-402 NMSA 1978), or a lessee rightfully rejects the goods (Section 55-2A-509 NMSA 1978) or justifiably revokes acceptance of the goods (Section 55-2A-517 NMSA 1978), then with respect to any goods involved, and with respect to all of the goods if under an installment lease contract the value of the whole lease contract is substantially impaired (Section 55-2A-510 NMSA 1978), the lessor is in default under the lease contract and the lessee may:

(a) cancel the lease contract (Section 55-2A-505(1) NMSA 1978);

(b) recover so much of the rent and security as has been paid and is just under the circumstances;

(c) cover and recover damages as to all goods affected whether or not they have been identified to the lease contract (Sections 55-2A-518 and 55-2A-520 NMSA 1978), or recover damages for nondelivery (Sections 55-2A-519 and 55-2A-520 NMSA 1978); or

(d) exercise any other rights or pursue any other remedies provided in the lease contract.

(2) If a lessor fails to deliver the goods in conformity to the lease contract or repudiates the lease contract, the lessee may also:

(a) if the goods have been identified, recover them (Section 55-2A-522 NMSA 1978); or

(b) in a proper case, obtain specific performance or replevy the goods (Section 55-2A-521 NMSA 1978).

(3) If a lessor is otherwise in default under a lease contract, the lessee may exercise the rights and pursue the remedies provided in the lease contract, which may include a right to cancel the lease, and in Section 55-2A-519(3) NMSA 1978.

(4) If a lessor has breached a warranty, whether express or implied, the lessee may recover damages (Section 55-2A-519(4) NMSA 1978).

(5) On rightful rejection or justifiable revocation of acceptance, a lessee has a security interest in goods in the lessee's possession or control for any rent and security that has been paid and any expenses reasonably incurred in their inspection, receipt, transportation and care and custody and may hold those goods and dispose of them in good faith and in a commercially reasonable manner, subject to Section 55-2A-527(5) NMSA 1978.

(6) Subject to the provisions of Section 55-2A-407 NMSA 1978, a lessee, on notifying the lessor of the lessee's intention to do so, may deduct all or any part of the damages resulting from any default under the lease contract from any part of the rent still due under the same lease contract.

History: 1978 Comp., § 55-2A-508, enacted by Laws 1992, ch. 114, § 63.

OFFICIAL COMMENTS

UCC Official Comments by ALI & the NCCUSL. Reproduced with permission of the PEB for the UCC. All rights reserved.

Uniform Statutory Source: — Sections 2-711 and 2-717 [55-2-711 and 55-2-717 NMSA 1978, respectively].

Changes: — Substantially rewritten.

1. This section is an index to Sections 2A-509 through 522 [55-2A-509 to 55-2A-522 NMSA 1978] which set out the lessee's rights and remedies after the lessor's default. The lessor and the lessee can agree to modify the rights and remedies available under this Article; they can, among other things, provide that for defaults other than those specified in subsection (1) the lessee can exercise the rights and remedies referred to in subsection (1); and they can create a new scheme of rights and remedies triggered by the occurrence of the default. Sections 2A-103(4) and 1-102(3) [55-2A-103 and 55-1-102 NMSA 1978, respectively].

2. Subsection (1), a substantially rewritten version of the provisions of Section 2-711(1) [55-2-711 NMSA 1978], lists three cumulative remedies of the lessee where the lessor has failed to deliver conforming goods or has repudiated the contract, or the lessee has rightfully rejected or justifiably revoked. Sections 2A-501(2) and (4) [55-2A-501 NMSA 1978]. Subsection (1) also allows the lessee to exercise any contractual remedy. This Article rejects any general doctrine of election of remedy. To determine if one remedy bars another in a particular case is a function of whether the lessee has been put in as good a position as if the lessor had fully performed the lease agreement. Use of multiple remedies is barred only if the effect is to put the lessee in a better position than it would have been in had the lessor fully performed under the lease. Sections 2A-103(4), 2A-501(4), and 1-106(1) [55-2A-103, 55-2A-501 and 55-1-106 NMSA 1978, respectively]. Subsection 1(b), in recognition that no bright line can be created that would operate fairly in all installment lease cases and in recognition of the fact that a lessee may be able to cancel the lease (revoke acceptance of the goods) after the goods have been in use for some period of time, does not require that all lease payments made by the lessee under the lease be returned upon cancellation. Rather, only such portion as is just of the rent and security payments made may be recovered. If a defect in the goods is discovered immediately upon tender to the lessee and the goods are rejected immediately, then the lessee should recover all payments made. If, however, for example, a 36-month equipment lease is terminated in the 12th month because the lessor has materially breached the contract by failing to perform its maintenance obligations, it may be just to return only a small part or none of the rental payments already made.

3. Subsection (2), a version of the provisions of Section 2-711(2) [55-2-711 NMSA 1978] revised to reflect leasing terminology, lists two alternative remedies for the recovery of the goods by the lessee; however, each of these remedies is cumulative with respect to those listed in subsection (1).

4. Subsection (3) is new. It covers defaults which do not deprive the lessee of the goods and which are not so serious as to justify rejection or revocation of acceptance under subsection (1). It also covers defaults for which the lessee could have rejected or revoked acceptance of the goods but elects not to do so and retains the goods. In either case, a lessee which retains the goods is entitled to recover damages as stated in Section 2A-519(3) [55-2A-519 NMSA 1978]. That measure of damages is "the loss resulting in the ordinary course of events from the lessor's default as determined in any manner that is reasonable together with incidental and consequential damages, less expenses saved in consequence of the lessor's breach."

5. Subsection (1)(d) and subsection (3) recognize that the lease agreement may provide rights and remedies in addition to or different from those which Article 2A provides. In particular, subsection (3) provides that the lease agreement may give the remedy of cancellation of the lease for defaults by the lessor that would not otherwise be material defaults which would justify cancellation under subsection (1). If there is a right to cancel, there is, of course, a right to reject or revoke acceptance of the goods.

6. Subsection (4) is new and merely adds to the completeness of the index by including a reference to the lessee's recovery of damages upon the lessor's breach of warranty; such breach may not rise to the level of a default by the lessor justifying revocation of acceptance. If the lessee properly rejects or revokes acceptance of the goods because of a breach of warranty, the rights and remedies are those provided in Subsection (1) rather than those in Section 2A-519(4) [55-2A-519 NMSA 1978].

7. Subsection (5), a revised version of the provisions of Section 2-711(3) [55-2-711 NMSA 1978], recognizes, on rightful rejection or justifiable revocation, the lessee's security interest in goods in its possession and control. Section 9-113 [55-9-113 NMSA 1978], which recognized security interests arising under the Article on Sales (Article 2), was amended with the adoption of this Article to reflect the security interests arising under this Article. Pursuant to Section 2A-511(4) [55-2A-511 NMSA 1978], a purchaser who purchases goods from the lessee in good faith takes free of any rights of the lessor, or in the case of a finance lease the supplier. Such goods, however, must have been rightfully rejected and disposed of pursuant to Section 2A-511 or 2A-512 [55-2A-511 and 55-2A-512 NMSA 1978, respectively]. However, Section 2A-517(5) [55-2A-517 NMSA 1978] provides that the lessee will have the same rights and duties with respect to goods where acceptance has been revoked as with respect to goods rejected. Thus, Section 2A-511(4) [55-2A-511 NMSA 1978] will apply to the lessee's disposition of such goods.

8. Pursuant to Section 2A-527(5) [55-2A-527 NMSA 1978], the lessee must account to the lessor for the excess proceeds of such disposition, after satisfaction of the claim secured by the lessee's security interest.

9. Subsection (6), a slightly revised version of the provisions of Section 2-717 [55-2-717 NMSA 1978], sanctions a right of set-off by the lessee, subject to the rule of Section 2A-407 [55-2A-407 NMSA 1978] with respect to irrevocable promises in a finance lease that is not a consumer lease, and further subject to an enforceable "hell or high water" clause in the lease agreement. Section 2A-407 [55-2A-407 NMSA 1978] official comment. No attempt is made to state how the set-off should occur; this is to be determined by the facts of each case.

10. There is no special treatment of the finance lease in this section. Absent supplemental principles of law and equity to the contrary, in the case of most finance leases, following the lessee's acceptance of the goods the lessee will have no rights or remedies against the lessor, because the lessor's obligations to the lessee are minimal. Sections 2A-210 and 2A-211(1) [55-2A-210 and 55-2A-211 NMSA 1978, respectively]. Since the lessee will look to the supplier for performance, this is appropriate. Section 2A-209.

Cross References: — Sections 1-102(3), 1-103, 1-106(1), Article 2, especially Sections 2-711, 2-717 and Sections 2A-103(4), 2A-209, 2A-210, 2A-211(1), 2A-407, 2A-501(2), 2A-501(4), 2A-509 through 2A-522, 2A-511(3), 2A-517(5), 2A-527(5) and Section 9-113 [55-1-102, 55-1-103, 55-1-106, 55-2-711, 55-2-717, 55-2A-103, 55-2A-209, 55-2A-210, 55-2A-211, 55-2A-407, 55-2A-501, 55-2A-509 to 55-2A-522, 55-2A-511, 55-2A-517, 55-2A-527 and 55-9-113 NMSA 1978, respectively].

"Conforming". Section 2A-103(1)(d) [55-2A-103 NMSA 1978].

"Delivery". Section 1-201(14) [55-1-201 NMSA 1978].

"Good faith". Sections 1-201(19) and 2-103(1)(b) [55-1-201 and 55-2-103 NMSA 1978, respectively].

"Goods". Section 2A-103(1)(h) [55-2A-103 NMSA 1978].

"Installment lease contract". Section 2A-103(1)(i) [55-2A-103 NMSA 1978].

"Lease contract". Section 2A-103(1)(l) [55-2A-103 NMSA 1978].

"Lessee". Section 2A-103(1)(n) [55-2A-103 NMSA 1978].

"Lessor". Section 2A-103(1)(p) [55-2A-103 NMSA 1978].

"Notifies". Section 1-201(26) [55-1-201 NMSA 1978].

"Receipt". Section 2-103(1)(c) [55-2-103 NMSA 1978].

"Remedy". Section 1-201(34) [55-1-201 NMSA 1978].

"Rights". Section 1-201(36) [55-1-201 NMSA 1978].

"Security interest". Section 1-201(37) [55-1-201 NMSA 1978].

"Value". Section 1-201(44) [55-1-201 NMSA 1978].

Effective dates. — Laws 1992, ch. 114, § 238 made Laws 1992, ch. 114, § 63 effective July 1, 1992.