When purchasing commercial real estate across the United States, the laws, guidelines and ethics are generally all the same, the reason being the creation of a Uniform Commercial Code.
What Is the Uniform Commercial Code (UCC)?
The Uniform Commercial Code (UCC) is a set of laws, agreed upon by all 50 states, Washington DC, and the US territories, that govern all commercial transactions in the United States. The UCC is not federal law, but rather, a “uniformly adopted state law.”
Because the UCC is universal across the country, businesses can enter into contracts knowing that the terms will be enforced in every jurisdiction. This way businesses can expand nationwide without any discrepancies.
A Brief History of the UCC
In 1892, the Uniform Law Commission was created to work on uniform commercial laws. In the years that followed, a number of uniform commercial laws were established and adopted in every state.
The UCC dates back to 1942 when the National Conference of Commissioners on Uniform State Laws (NCCUSL) and the American Law Institute (ALI) started to draft the official Code. The first state to adopt the UCC was Pennsylvania, with every other state doing the same over the next 20 years. Since then, the UCC has undergone many changes and updates.
The Code itself is not law, but recommendations of laws that should be adopted by each jurisdiction. The recommendations, once adopted into law by a state, then become a part of the state’s “code of statuses.”
States can enact the UCC word-for-word, or they can make specific changes. Usually those changes are minor, but it’s still important to note that “the Uniform Commercial Code is not actually ‘uniform’ across states,” said Michael C. Zahrt, an attorney at FosterSwift. In fact, some jurisdictions, such as Louisiana and Puerto Rico, do not follow certain articles in the UCC. However, for the most part, the Code remains uniform, give or take some minor changes.
There is also an established editorial board for the UCC, put together by the NCCUSL and ALI, and they are seen as the authority when it comes to interpretations of the Code.
The Articles of the Uniform Commercial Code
- Article 1, General Provisions
- Article 2, Sales
- Article 2A, Leases
- Article 3, Negotiable Instruments
- Article 4, Bank Deposits and Collections
- Article 4A, Funds Transfer
- Article 5, Letters of Credit
- Article 6, Bulk Transfers and Bulk Sales
- Article 7, Warehouse Receipts, Bills of Lading, and Other Documents of Title
- Article 8, Investment Securities
- Article 9, Secured Transactions
What Is Article 2 in the UCC?
Article 2 in the UCC deals specifically with sales of goods. According to Zahrt, the article “is meant to provide default rules and gap-fillers that apply where two parties have not comprehensively addressed common issues in a written contract.”
This article therefore applies to matters such as the time of payment, form of payment, method of delivery, risk of loss and more. It’s important to note that this legal guidance specifically applies to physical goods and not services.
Article 2 also differentiates between “merchants” and “non-merchants,” and the UCC in this case only applies to merchants. A merchant is a person or entity that is dealing the goods.
Why Is the Uniform Commercial Code Important for Commercial Real Estate Investors?
For investors and companies who do business in multiple states, the Uniform Commercial Code is extremely important, as it ensures some standardization for their business.
Many Transactions Extend Beyond One State
When a commercial real estate deal encompasses multiple states, the Uniform Commercial Code is important to ensure all the terms of the deal remain consistent across state lines. Wikipedia provides the following example: “goods may be manufactured in State A, warehoused in State B, sold from State C, and delivered in State D,” and all of this supply chain might fall under one commercial deal. In this case, the laws surrounding these goods and services need to be uniform.
In most cases, though, the UCC comes into play when there is a dispute across state lines. For instance, in 2006, a case titled “Gonsalves v. Montgomery” utilized the UCC in a sale between plaintiff Joseph Gonsalves, who was a resident of California, and defendants Harold Montgomery and Frannie Montgomery, who did business in Oregon.
The plaintiff and defendants entered into a written contract for the defendants to construct a boat in Oregon for the plaintiff in California. In this case, there was a dispute over costs and labor. The court turned to the California Commercial Code, which is the legal state version of the UCC, to solve the dispute. Because the commercial transaction spanned across two states, it was important for the laws to be uniform so the plaintiff and defendant would know what their responsibilities were when it came to enacting the terms of the contract.
Regulates Contracts Between States
When two investors in different states are striking a deal, the UCC is of great importance in that it ensures the two states are in agreement regarding all of the legal elements of the contract. This consistency helps companies and individuals conduct business across state lines.
The Uniform Commercial Code Maintains Consistency
Although there are minor discrepancies across states, the UCC usually prevents any major disputes across state lines and ensures that commercial deals run smoothly. The Code is important to make sure there are fewer contract disputes, and that all transactions are abiding by the same laws.