Just because a document is labeled a lease may not make it so under commercial law. One of the more heavily contested issues under the Uniform Commercial Code (UCC) is whether an agreement transferring use and possession of personal property from one party to another is actually a lease as opposed to a sale subject to a security agreement. Today we discuss the advantages and disadvantages of a “true lease” versus a security agreement, the legal considerations in determining how an agreement should be characterized under the UCC and some interesting recent decisions in this area.

Lease or Security Agreement

There are many reasons from the legal perspective why a creditor may want to characterize the transaction as a lease and not a sale subject to a security interest. A lease affords protections to a lessor that a holder of a security interest does not have. For example, a “true lease” of goods is governed by Article 2A of the UCC. A creditor not in the business of leasing goods may be able to benefit from the Article 2A provisions dealing with “finance leases.”1 Under those provisions, the lessor is not responsible for the condition of the goods and does make implied warranties of fitness or merchantability. Those provisions also make the lessee’s obligations to the lessor under the lease irrevocable and independent of the lessor’s obligations or the condition of the leased goods (the latter being known as “hell or high water” obligations).

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