2018 New Mexico Statutes
Chapter 55 - Uniform Commercial Code
Article 2A - Leases
Section 55-2A-518 - Cover; substitute goods.

(1) After a default by a lessor under the lease contract of the type described in Subsection (1) of Section 55-2A-508 NMSA 1978, or, if agreed, after other default by the lessor, the lessee may cover by making any purchase or lease of or contract to purchase or lease goods in substitution for those due from the lessor.

(2) Except as otherwise provided with respect to damages liquidated in the lease agreement (Section 55-2A-504 NMSA 1978) or otherwise determined pursuant to agreement of the parties (Section 55-1-302 NMSA 1978 and Section 55-2A-503 NMSA 1978), if a lessee's cover is by a 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 lessee may recover from the lessor as damages: (i) the present value, as of the date of the commencement of the term of the new lease agreement, of the rent under the new lease agreement applicable to that period of the new lease term that is comparable to the then remaining term of the original lease agreement minus the present value as of the same date of the total rent for the then remaining lease term of the original lease agreement; and (ii) any incidental or consequential damages, less expenses saved in consequence of the lessor's default.

(3) If a lessee's cover is by lease agreement that for any reason does not qualify for treatment under Subsection (2) of this section, or is by purchase or otherwise, the lessee may recover from the lessor as if the lessee had elected not to cover and Section 55-2A-519 NMSA 1978 governs.

History: 1978 Comp., § 55-2A-518, enacted by Laws 1992, ch. 114, § 73; 2005, ch. 144, § 40.

OFFICIAL COMMENTS

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

Uniform Statutory Source: — Section 2-712 [55-2-712 NMSA 1978].

Changes. — Substantially revised.

1. Subsection (1) allows the lessee to take action to fix its damages after default by the lessor. Such action may consist of the lease of goods. The decision to cover is a function of commercial judgment, not a statutory mandate replete with sanctions for failure to comply. Cf. Section 9-625 [55-9-625 NMSA 1978].

2. Subsection (2) states a rule for determining the amount of lessee's damages provided that there is no agreement to the contrary. The lessee's damages will be established using the new lease agreement as a measure if the following three criteria are met: (i) the lessee's cover is by lease agreement, (ii) the lease agreement is substantially similar to the original lease agreement, and (iii) such cover was effected in good faith, and in a commercially reasonable manner. Thus, the lessee will be entitled to recover from the lessor the present value, as of the date of commencement of the term of the new lease agreement, of the rent under the new lease agreement applicable to that period which is comparable to the then remaining term of the original lease agreement less the present value of the rent reserved for the remaining term under the original lease, together with incidental or consequential damages less expenses saved in consequence of the lessor's default. Consequential damages may include loss suffered by the lessee because of deprivation of the use of the goods during the period between the default and the acquisition of the goods under the new lease agreement. If the lessee's cover does not satisfy the the criteria of subsection (2), Section 2A-519 [55-2A-519 NMSA 1978] governs.

3. Two of the three criteria to be met by the lessee are familiar, but the concept of the new lease agreement being substantially similar to the original lease agreement is not. Given the many variables facing a party who intends to lease goods and the rapidity of change in the market place, the policy decision was made not to draft with specificity. It was thought unwise to seek to establish certainty at the cost of fairness. Thus, the decision of whether the new lease agreement is substantially similar to the original will be determined case by case.

4. While the section does not draw a bright line, it is possible to describe some of the factors that should be considered in finding that a new lease agreement is substantially similar to the original. First, the goods subject to the new lease agreement should be examined. For example, in a lease of computer equipment the new lease might be for more modern equipment. However, it may be that at the time of the lessor's breach it was not possible to obtain the same type of goods in the market place. Because the lessee's remedy under Section 2A-519 [55-2A-519 NMSA 1978] is intended to place the lessee in essentially the same position as if he had covered, if goods similar to those to have been delivered under the original lease are not available, then the computer equipment in this hypothetical should qualify as a commercially reasonable substitute. See Section 2-712(1) [55-2-712 NMSA 1978].

5. Second, the various elements of the new lease agreement should also be examined. Those elements include the presence or absence of options to purchase or release; the lessor's representations, warranties and covenants to the lessee, as well as those to be provided by the lessee to the lessor; and the services, if any, to be provided by the lessor or by the lessee. All of these factors allocate cost and risk between the lessor and the lessee and thus affect the amount of rent to be paid. If the differences between the original lease and the new lease can be easily valued, it would be appropriate for a court to adjust the difference in rental to take account of the difference between the two leases, find that the new lease is substantially similar to the old lease, and award cover damages under this section. If, for example, the new lease requires the lessor to insure the goods in the hands of the lessee, while the original lease required the lessee to insure, the usual cost of such insurance could be deducted from the rent due under the new lease before determining the difference in rental between the two leases.

6. Having examined the goods and the agreement, the test to be applied is whether, in light of these comparisons, the new lease agreement is substantially similar to the original lease agreement. These findings should not be made with scientific precision, as they are a function of economics, nor should they be made independently with respect to the goods and each element of the agreement, as it is important that a sense of commercial judgment pervade the finding. To establish the new lease as a proper measure of damage under subsection (2), these factors, taken as a whole, must result in a finding that the new lease agreement is substantially similar to the original.

7. A new lease can be substantially similar to the original lease even though its term extends beyond the remaining term of the original lease, so long as both (a) the lease terms are commercially comparable (e.g., it is highly unlikely that a one-month rental and a five-year lease would reflect similar commercial realities), and (b) the court can fairly apportion a part of the rental payments under the new lease to that part of the term of the new lease which is comparable to the remaining lease term under the original lease. Also, the lease term of the new lease may be comparable to the term of the original lease even though the beginning and ending dates of the two leases are not the same. For example, a two-month lease of agricultural equipment for the months of August and September may be comparable to a two-month lease running from the 15th of August to the 15th of October if in the particular location two-month leases beginning on August 15th are basically interchangeable with two-month leases beginning August 1st. Similarly, the term of a one-year truck lease beginning on the 15th of January may be comparable to the term of a one-year truck lease beginning January 2d. If the lease terms are found to be comparable, the court may base cover damages on the entire difference between the costs under the two leases.

Cross References. — Sections 2-712(1), 2A-519 and 9-625 [55-2-7125555 NMSA 1978, respectively].

"Agreement". Section 1-201(b)(3) [55-1-201(b)(3) NMSA 1978].

"Contract". Section 1-201(b)(12) [55-1-201(b)(12) NMSA 1978].

"Good faith". Section 1-201(b)(20) [55-1-201(b)(20) NMSA 1978].

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

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

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

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

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

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

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

"Present value". Section 1-201(b)(28) [55-1-201(b)(28) NMSA 1978].

"Purchase". Section 2A-103(1)(v) [55-2A-103(1)(v) NMSA 1978].

The 2005 amendment, effective January 1, 2006, changed the statutory reference from Subsection (3) of Section 15-1-102 NMSA 1978 to Section 55-1-302 NMSA 1978.