Default by Lessees

The Commercial Code in Division 10, Chapter 5, deals with defaults by lessees in personal property leases.  Section 10523 provides that, if a lessee wrongfully rejects or revokes acceptance of goods or fails to make a payment when due or repudiates with respect to a part or the whole, then, with respect to any goods involved, the lessee is in default under the lease contract and the lessor may take one of six specified actions.

If a lessor does not fully exercise a right or obtain a remedy to which the lessor is entitled, the lessor may recover the loss resulting in the ordinary course of events from the lessee’s default as determined in any reasonable manner, together with incidental damages, less expenses saved in consequence of the lessee’s default Also, if a lessee is otherwise in default under a lease contract, the lessor may exercise the rights and pursue the remedies provided in the lease contract, which may include a right to cancel the lease.

Section 10524 provides, after a default by the lessee under the lease contract or, if agreed, after other default by the lessee, the lessor may take one of two specified actions. If the goods are unfinished, in the exercise of reasonable commercial judgment for the purposes of avoiding loss and of effective realization, an aggrieved lessor or the supplier may either complete manufacture and wholly identify the goods to the lease contract or cease manufacture and lease, sell, or otherwise dispose of the goods for scrap or salvage value or proceed in any other reasonable manner.

Section 10525 allows the lessor to refuse to deliver the goods if a lessor discovers the lessee to be insolvent. After a default by the lessee under the lease contract or, if agreed, after other default by the lessee, the lessor has the right to take possession of the goods. If the lease contract so provides, the lessor may require the lessee to assemble the goods and make them available to the lessor at a place to be designated by the lessor which is reasonably convenient to both parties. 

Section 10526 allows a lessor to stop delivery of goods in the possession of a carrier or other bailee if the lessor discovers the lessee to be insolvent and may stop delivery of carload, truckload, planeload, or larger shipments of express or freight if the lessee repudiates or fails to make a payment due before delivery, whether for rent, security, or otherwise under the lease contract, or for any other reason the lessor has a right to withhold or take possession of the goods.

The lessor may stop delivery until three specified conditions. To stop delivery, a lessor is required to notify as to enable the bailee by reasonable diligence to prevent delivery of the goods. After notification, the bailee must hold and deliver the goods according to the directions of the lessor, but the lessor is liable to the bailee for any ensuing charges or damages.

Section 10527 says that, after a default by a lessee under the lease contract or after the lessor refuses to deliver or takes possession of goods or, if agreed, after other default by a lessee, the lessor may dispose of the goods concerned or the undelivered balance thereof by lease, sale, or otherwise.

If the disposition is by lease agreement substantially similar to the original lease agreement and the new lease agreement is made in good faith and in a commercially reasonable manner, the lessor may recover from the lessee specified damages.

If the lessor’s disposition is by lease agreement that for any reason does not qualify for treatment or is by sale or otherwise, the lessor may recover from the lessee as if the lessor had elected not to dispose of the goods. A subsequent buyer or lessee who buys or leases from the lessor in good faith for value as a result of a disposition under this section takes the goods free of the original lease contract and any rights of the original lessee even though the lessor fails to comply with one or more of the requirements of this division.

Section 10528 states that, if a lessor elects to retain the goods or a lessor elects to dispose of the goods and the disposition is by lease agreement that for any reason does not qualify for treatment, or is by sale or otherwise, the lessor may recover from the lessee as damages for a default.

If the measure of damages is inadequate to put a lessor in as good a position as performance would have, the measure of damages is the present value of the profit, including reasonable overhead, the lessor would have made from full performance by the lessee, together with any incidental damages allowed, due allowance for costs reasonably incurred and due credit for payments or proceeds of disposition.

Section 10529 specifies that, after default by the lessee under the lease contract or, if agreed, after other default by the lessee, the lessor may recover from the lessee as damages for either goods accepted by the lessee or for good identified in the lease contract where the lessor has never delivered the goods.

The lessor must hold for the lessee for the remaining lease term of the lease agreement any goods that have been identified to the lease contract and are in the lessor’s control. The lessor may dispose of the goods at any time before collection of the judgment for damages obtained. There is a specified rule if the disposition is before the end of the remaining lease term of the lease agreement.

Payment of the judgment for damages obtained entitles the lessee to the use and possession of the goods not then disposed of for the remaining lease term of and in accordance with the lease agreement. After default by the lessee under the lease contract or, if agreed, after other default by the lessee, a lessor who is held not entitled to rent under this section must nevertheless be awarded damages for nonacceptance.

Section 10530 provides that incidental damages to an aggrieved lessor include any commercially reasonable charges, expenses, or commissions incurred in stopping delivery, in the transportation, care and custody of goods after the lessee’s default, in connection with return or disposition of the goods, or otherwise resulting from the default.

Section 10531 states that, if a third-party deals with goods that have been identified to a lease contract as to cause actionable injury to a party to the lease contract (1) the lessor has a right of action against the third party, and (2) the lessee also has a right of action against the third party if the lessee meets one of the three specified conditions.

In addition, it at the time of the injury, the party plaintiff did not bear the risk of loss as against the other party to the lease contract and there is no arrangement between them for disposition of the recovery, his or her suit or settlement, subject to his or her own interest, is as a fiduciary for the other party to the lease contract.

Section 10532 states, in addition to any other recovery permitted, the lessor may recover from the lessee an amount that will fully compensate the lessor for any loss of or damage to the lessor’s residual interest in the goods caused by the default of the lessee.