AUSTIN, Texas — As more states adopt the 2022 Uniform Commercial Code amendments, hybrid leases represent a game changer for equipment lessors utilizing bundled or as-a-service transactions.
With the rise of as-a-service and bundled transactions, creation of hybrid leases is a valuable opportunity for equipment lessors, Eddie Gross, shareholder at Washington-based business law firm Vedder Price’s global transportation finance team, said during an Oct. 28 panel at the Equipment Leasing and Finance Association’s annual convention.
“Hybrid leases are a new thing, and a really good thing, if you do bundle transactions,” he said. “It’ll make those deals more valuable and easier to sell and buy.”
A hybrid lease is a lease of goods or products plus either a provision of services, goods or property, Dominic Liberatore, deputy general counsel at De Lage Landen Financial Services, explained during the panel.
“It’s primarily been a combination of lease of goods and embedded service, so that’s still part of it. Or it could also be a sale of other goods — paper, toner or supplies,” he said. “The other thing could also be a license or transfer of other rights to other property other than the equipment,” with software representing a typical example.
Hybrid leases under 2022 UCC amendments
The Uniform Commercial Code’s (UCC) 2022 amendments provide a roadmap for developing enforceable hybrid leases, Liberatore said.
“The UCC gives you breadcrumbs to follow to establish whether or not it’s a hybrid lease and whether or not the equipment is the predominant purpose,” he said.
Lessors should “include lessee acknowledgment supporting the predominant purpose, lessee acknowledgment supporting finance lease treatment and, if you believe that it might not be the predominant purpose, at least include an allocation of what the leased equipment portion is so you get ‘hell or high water’ for that piece.”
Meeting the hybrid leases definition, including the finance lease component, helps lessors ensure payment under the “hell or high water” provision, Liberatore said. The “hell of high water” provision requires lessees to pay the lessor for the equipment regardless of circumstances, but may not necessarily cover certain add-ons that do not meet the predominant purpose provision.
“If you fit the new definition of hybrid lease, you’re going to get some of the two-way protections [that are] very lessor friendly,” he said. “If you fit the finance lease definition, you’re going to get ‘hell or high water’ treatment for all or part of the deal when it drills down into details, but that is an important thing.”
States already adopting amendments
Twenty-five states have adopted the 2022 UCC amendments, and they are in effect in 23, according to each state’s legislative filing. The amendments take effect in Oklahoma on Nov.1 and in Illinois, the most recent adopter, on Jan. 1, 2025. With half of the states adopting the amendments, a game-changing shift is underway in the industry, Liberatore said.
“The other half will clearly pass it,” he said. “It’ll take a little while for courts to fully get their arms around this, because it is a big change from what I’ve been saying for the last 20 years.”
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