Notifications of Lease Assignments:: Lease Buyers Beware!

IT IS IMPORTANT for an assignee (Assignee) of a lease to properly notify the lessee of the assignment to ensure the lessee is legally obligated to pay the Assignee and not the originating lessor (Assignor). Section 9-406 of the Uniform Commercial Code (UCC) details how to provide such proper notice. This article will highlight the material requirements, some best practices for Assignors and Assignees, as well as how lessees can avoid having to make double payments. 

Under UCC Section 9-406, a lessee may discharge its lease obligations by paying the Assignor until, but not after, the lessee receives a notice of assignment, authenticated by the Assignor or the Assignee, that states amounts due or to become due under the lease have been assigned to the Assignee and thereafter payments are to be made only to the Assignee. If a lessee receives a proper notice, yet continues to pay the Assignor, the lessee will not discharge its payment obligations. A lessee would still need to pay the Assignee such amounts, thereby resulting in a double payment. Similarly, if a lessee receives an improper notice, yet makes its payments to the purported Assignee, the lessee would not be discharged of its obligations to the Assignor by virtue of having made such payments to the purported Assignee.

The below highlights what this means for your business:

• The assignment notice may come from either the Assignee or Assignor. The UCC does not require that the assignment notice must come from the Assignor. 
• An assignment notice must reasonably identify the rights being assigned. Therefore, it is a good practice to identify the lease or schedule being assigned with some specificity. It is good practice to also include the amount of each payment and the number of remaining payments that are being assigned. Note that if the assignment notice instructs the lessee to make less than the full amount of any installment to the Assignee, the lessee can elect to treat the notice as ineffective (UCC 9-406 (b) (3)). 
• The assignment notice must be authenticated. Authentication is not an overly burdensome task. The notice of assignment should be signed (including electronically) in writing and delivered by either the Assignee or Assignor on such sending party’s letterhead or in some other way that reasonably identifies the party providing the notice. 
• The lessee must actually receive the assignment notice. Merely sending a notice to the lessee is not sufficient. The assignment notice should therefore be delivered in a manner that ensures the sending party can verify receipt by the lessee. Although specific delivery methods are not mandated by UCC Section 9-406, and subject to any notice provisions in the lease, it is a good practice to send a notice via a nationally recognized overnight courier (e.g., FedEx or UPS) or via USPS certified or registered mail, return receipt requested, and also via email. The sending party should retain evidence of the lessee’s receipt of such written notice.
• UCC Section 9-406 gives a lessee the right to require reasonable proof of the assignment from the Assignee. It is common in the capital markets space for the assignment notice to come from the Assignor and it often will be signed by both the Assignor and Assignee.

Assignment notices given by the Assignee alone are more frequently the notices that give rise to requests for reasonable proof of the assignment. Merely receiving invoices or verbal directions from the Assignee will usually not satisfy the burden of proof. As a practical matter, although not required by UCC Section 9-406, if a lessee receives a notice from only the Assignee, it is generally prudent for the lessee to ask the Assignor to confirm the assignment since the Assignor is the entity with whom the lessee has been dealing. This is why it is common for both the Assignor and the Assignee to sign the assignment notice in the capital markets space. 

If the lessee has any concerns about the validity of the notice, the lessee can also ask the Assignee for reasonable proof of assignment. Some examples of proof are a copy (albeit redacted) of the signed assignment agreement and/or a copy of the lease along with a copy of the UCC-1 financing statement evidencing the transfer to the Assignee. Note that merely sending a copy of the UCC-1 financing statement to the lessee would probably not be sufficient. Under UCC 9-406(c), unless a lessee receives such reasonable proof, it may generally discharge its obligations in the normal course by paying the Assignor. 

A lessee might decide to make payment to the Assignee while awaiting further reasonable proof, but a lessee should do so with great caution. If a lessee pays the Assignee and never receives reasonable proof, and it turns out that Assignee was not a valid holder of the assigned rights, the lessee would not have discharged its obligation to the Assignor for payments made to the Assignee and would still owe such amounts to the Assignor. 

As a practical matter, a lessee should promptly notify an Assignee if the assignment notice appears inadequate for any reason and request reasonable proof to resolve any issues in order to ensure payments are delivered to the correct party to discharge the lessee’s obligations. Indeed, Official Comment 3 to UCC 9-406 states “If [a lessee] has doubt as to the adequacy of a notification, it may not be safe in disregarding the notification unless it notifies the assignee with reasonable promptness as to the respects in which the [lessee] considers the notification ineffective.” Further, even after proof is supplied, Official Comment 4 to UCC 9-406 states that “[a lessee] that questions the adequacy of proof submitted by an assignee would be well advised to promptly inform the assignee of the defects.” 

Note that if a payment is due after a lessee has received an assignment notice, but prior to the receipt of the requested additional reasonable proof, the lessee may pay the Assignor to avoid default under the lease, and receive credit toward the discharge of the obligation in the amount of such payment. However, the lessee should not accelerate or pay significantly in advance, any amount purportedly assigned which has not become due, if the lessee is still waiting for reasonable proof of assignment. The lessee should give the Assignee the opportunity to timely deliver such additional proof before any such payment due date to ensure delivery to the proper party. Official Comment 4 to UCC 9-406 states that “a [lessee] that has received a notification of assignment and who has requested reasonable proof of the assignment may discharge its obligation by paying the assignor at the time (or even earlier if reasonably necessary to avoid risk of default) when a payment is due, even if the [lessee] has not yet received a response to its request for proof.” The Official Comment further provides “a [lessee] may not discharge its obligation by paying the assignor substantially in advance of the time that the payment is due unless the assignee has failed to provide the proof [timely].”

Conclusion

The foregoing summarizes some of the key elements and considerations when giving notice of a lease assignment to a lessee or if you are responding to a lessee’s request to provide reasonable proof of such assignment. An Assignee will want to ensure strict compliance with the requirements of UCC 9-406 in order for it to receive prompt payment of the rights assigned to it and prevent such payments from going to the Assignor. Furthermore, doing so may also reduce the likelihood of a request for reasonable proof.