The Leased Equipment Does Not Work and the Finance Company Still Wants Payment: California Law

Last updated: November 2026. Reviewed by Pavel Kolmogorov, California business litigation attorney (State Bar No. 321018).

Your company leased a machine, it never worked, and the finance company says the payments continue anyway. Under California law that is often correct. In a finance lease to a business, Commercial Code section 10407 makes the lessee's promises irrevocable and independent once the goods are accepted. The warranty claim usually runs against the supplier, not the funder. The answer changes if you never accepted the equipment or the document is not a true finance lease. Kolmogorov Law, P.C. handles these disputes in Orange County, Los Angeles, and across California.

Call (909) 235-6116 or contact us online to discuss equipment that failed, or a lessee that stopped paying.

Start by identifying what you signed

Three different deals get called an equipment lease.

A true lease is a rental. The lessor owns the equipment, often supplies it, and takes it back at the end. A finance lease is a three-party arrangement. You pick the equipment and the vendor, a finance company buys it and leases it to you, and the finance company never touches the machine. The Commercial Code defines it that way. The lessor does not select, manufacture, or supply the goods and acquires them in connection with the lease. One of four statutory steps must also occur, such as the lessee receiving the supply contract or written notice of its warranty rights before signing. (Com. Code, § 10103, subd. (a)(7).)

The third category is a sale dressed as a lease. If you cannot terminate and you may buy the equipment at the end for a nominal price, the transaction creates a security interest, not a lease. (Com. Code, § 1203, subd. (b).) The dollar-buyout "lease" is the usual example. Different rules then govern default and repossession.

Which box you are in decides nearly everything that follows.

Why the finance company says you must keep paying

Lenders call it the hell or high water rule. In a finance lease that is not a consumer lease, the lessee's promises become irrevocable and independent upon acceptance of the goods. They are enforceable by assignees and are not subject to cancellation, modification, or excuse without the consent of the party they run to. (Com. Code, § 10407, subds. (a), (b).)

The logic is that the funder only supplied money. Consistent with that, the implied warranty of merchantability does not arise from a finance lessor. (Com. Code, § 10212, subd. (a).) Most lease forms repeat the rule in a clause of their own, and the statute does not disturb whatever validity those clauses have under other law. (Com. Code, § 10407, subd. (c).)

So a broken machine is, by itself, usually not a defense to the funder's claim for rent.

Where the rule stops

It turns on acceptance. Acceptance occurs after the lessee has had a reasonable opportunity to inspect and signals that the goods conform, signals that it will keep them despite a nonconformity, or fails to make an effective rejection. (Com. Code, § 10515, subd. (a).) Equipment that was never delivered, never installed, or rejected promptly in writing may never have been accepted at all.

This is why the delivery and acceptance certificate matters so much. Funders ask for it before they pay the vendor. I have seen it signed on the day of delivery, before anyone powered the machine on. Do not sign one until the equipment runs.

Acceptance can sometimes be revoked. In a finance lease the grounds are narrow. The defect must substantially impair the equipment's value, the lessee must have accepted without discovering it, and the acceptance must have been reasonably induced by the lessor's own assurances. A lessee may also revoke if the lessor itself defaults in a way that substantially impairs the goods' value. Revocation must come within a reasonable time and is not effective until the lessor is notified. (Com. Code, § 10517, subds. (a), (b), (d).)

Other limits depend on facts. A funder that selected or supplied the equipment is not a finance lessor. A lessee who was deceived into signing may have a fraudulent inducement claim, and a close relationship between the funder and the vendor is a fact worth investigating.

Your claim against the supplier

The law does not leave the lessee without a remedy. It moves the remedy. In a finance lease, the supplier's promises to the lessor and all warranties under the supply contract extend to the lessee, subject to the terms of that contract and the supplier's defenses under it. The lessee also keeps any rights it has against the supplier directly. (Com. Code, § 10209, subds. (a), (d).)

In practice you sue the vendor for the defective machine while the lease payments continue. Give the vendor prompt written notice of every failure. Our pages on commercial warranty claims and sale of goods disputes cover the proof. An action for default under a lease, including breach of warranty, generally must be filed within four years, and a business lease may shorten that to as little as one year. (Com. Code, § 10506, subd. (a).) The supply contract may set its own limits.

What to do now, in order

Pull the lease, the vendor quote, and anything titled acceptance or delivery certificate. Note the dates.
Send written notice of the defects to the vendor and the finance company. State whether you reject the equipment or revoke acceptance, if the facts support it.
Keep the machine intact and document every service call.
Check for a personal guaranty. Most small-business leases have one.
Get advice before you stop paying. Stopping usually triggers acceleration of the remaining rent and a claim on the guaranty.

If you are the lessor pursuing a lessee in default

When a lessee fails to pay or wrongfully rejects, the lessor may cancel, take possession, dispose of the goods and recover damages, keep them and recover damages, or in a proper case sue for the rent. (Com. Code, § 10523, subd. (a).)

The rent action has conditions. For accepted goods the lessee still holds, the lessor may recover accrued rent plus the present value of the remaining rent, less expenses saved. For goods the lessor has taken back, that recovery is available only if a reasonable effort to dispose of them at a reasonable price fails or would be futile. If the equipment is re-leased or sold before the term ends, damages are measured against the new rent or the market rent, and the lessee receives an appropriate credit. (Com. Code, §§ 10527, 10528, 10529.)

That is the lease version of mitigation. A lessor that repossesses and lets the equipment sit weakens its own claim. Acceleration and stipulated-loss clauses are also tested as liquidated damages.

What to bring to the first meeting

The lease or equipment finance agreement, with any guaranty.
The vendor's quote, invoice, and warranty.
Any delivery or acceptance certificate, and who signed it.
Service records, photos, and emails about the failures.
The payment history and any default or acceleration letter.

Frequently asked questions

The machine we leased never worked but the finance company says we must keep paying. Is that right under California law?

Often, yes. If the deal is a finance lease and your business accepted the equipment, California Commercial Code section 10407 makes the payment promise irrevocable and independent of the machine's performance. Your claim for the defect is usually against the supplier. If you never accepted the equipment, or revoked acceptance on a permitted ground, the result can differ.

What is a hell or high water clause in California?

It is a lease term, backed by Commercial Code section 10407, that requires a business lessee in a finance lease to keep paying after accepting the goods regardless of defects or disputes. The promise is enforceable by the lessor and its assignees. The statutory rule does not apply to consumer leases, and it depends on acceptance.

Can I sue the equipment vendor if I leased through a finance company?

Yes. In a California finance lease the supplier's promises and warranties to the finance company extend to the lessee under Commercial Code section 10209, subject to the terms of the supply contract. You may also have direct claims based on what the vendor told you. The lease payments usually continue while that claim is pursued.

We signed the acceptance certificate before the equipment was installed and it has never run. Are we stuck with the lease?

Not necessarily, but the certificate is the funder's best evidence. California law treats acceptance as occurring after a reasonable opportunity to inspect, and it allows revocation in a finance lease only in narrow cases, such as acceptance induced by the finance company's own assurances. Timing matters, so send written notice promptly and have the documents reviewed.

What can an equipment lessor recover after a default in California?

Under the Commercial Code a lessor may repossess, re-lease or sell the equipment and recover the shortfall, or in some cases sue for accrued rent plus the present value of the remaining rent. A re-lease or sale reduces the damages under formulas tied to the new rent or market rent, not always the actual proceeds. Many leases add a guaranty and attorney fees.

Talk to a California breach of contract attorney

If your business is paying for equipment that does not work, or holds a lease in default, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is located at 327 Magnet, Irvine, CA 92618, and represents businesses in Orange County, Los Angeles, and throughout California.

This page provides general information about California law and is not legal advice. Outcomes depend on the lease, the acceptance facts, and the court.