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84-2a-518. Cover; substitute goods. (1) After default by a lessor under the lease contract of the type described in K.S.A. 84-2a-508(1), and amendments thereto, 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 (K.S.A. 84-2a-504, and amendments thereto) or otherwise determined pursuant to agreement of the parties (K.S.A. 2023 Supp. 84-1-302 and K.S.A. 84-2a-503, and amendments thereto), 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 (a) 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 which 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 (b) 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), or is by purchase or otherwise, the lessee may recover from the lessor as if the lessee had elected not to cover and K.S.A. 84-2a-519, and amendments thereto, governs.

History: L. 1991, ch. 295, § 66; L. 2007, ch. 89, § 37; July 1, 2008.

KANSAS COMMENT, 1996

1. The "cover" measure of damages under this section is based on section 84-2-712 and is the preferred remedy for lessees. It seeks to put the lessee in the same position it would have been had the lease contract been performed: the lessee has comparable goods and is able to recover from the lessor the excess cost of the substitute transaction. Subsection (1) broadly authorizes a lessee to enter into a cover transaction in the event of statutory or other default, permitting the lessee to cover by making any purchase or lease of goods in substitution for those due under the lease contract.

2. By satisfying the requirements for cover set out in subsection (2), the lessee is able to fix its damages based on the rent it pays, rather than relying on market rent. To qualify for the cover measure of damages, a lessee must meet the following requirements. First, the lessee must cover by a new lease contract. Although subsection (1) authorizes cover by purchase, the interest in the goods obtained by a purchase is fundamentally different from the interest obtained by lease, and so subsection (2) does permit use of a covering purchase to fix damages. Second, the lease contract must be made in good faith and in a commercially reasonable manner. "Good faith" is defined in 84-1-201(19) and 84-2a-103(3) (incorporating 84-2-103(b)). The requirement that the purchase be in a commercially reasonable manner extends an objective requirement to all cover transactions subject to Article 2A, not just those involving merchants. Note that this section omits the requirement of section 84-2-712(1) that cover be without unreasonable delay. Presumably, however, delay would be a factor to consider in evaluating whether the lessee acted in good faith and in a commercially reasonable manner. Third, the covering lease contract must be "substantially similar to the original lease agreement." Official Comments 3-7 address this requirement at length, and highlight two considerations: the goods subject to the new lease; and the various elements of the new lease, such as any options to purchase, the warranties or representations made, and any services to be provided. Determination of substantial similarity is to be done on a case-by-case basis, guided by the following principle: "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." See Official Comment 6 to this section.

3. A lessee that properly covers under this section may, under subsection (2), recover as damages from the lessor the present value of the rent under the new lease contract minus the present value of the rent under the original lease contract (for a comparable period of time), plus any incidental or consequential damages but less any expenses saved in consequence of the default. The measure of damages differs from the statutory analogue by expressly incorporating the concept of present value, which is necessary because rent payments ordinarily are made over time. For the statutory definition of "present value," see 84-2a-103(1)(u). This subsection also attempts to adjust for what likely will be differing lease periods between the new lease and the original lease.

4. Resort to this section is not mandatory. A lessee that elects not to cover may proceed to claim market rent damages under section 84-2a-519. Subsection (3) provides that a lessee that covers by lease agreement that does not satisfy this section, or by purchase or otherwise, also may use section 84-2a-519. The one exception is that a buyer that fails to cover may not recover consequential damages that cover could have prevented. See 84-2a-520(2)(a). Unlike Article 2, it is clear that, under Article 2A, a lessee that properly covers is precluded from recovering market damages. See 84-2a-519(1). Compare 1996 Kansas Comment 3 to 84-2-712.


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