Personal property leases

     If A leases a $1200 piece of equipment to B for one year under a lease providing that B will own the equipment after making twelve monthly payments of $100.00, it is clear that what the parties have called a lease is really a sale. And if, pursuant to terms of the lease or pursuant to state law governing leases, A may retake possession of the equipment upon B's failure to make a monthly "rental" payment, then the sale is really a purchase-money secured sale. U.C.C. 9109(a)(1), Official Comment 2 to U.C.C. 9-109, U.C.C. 1-201(37).   This is nothing more than a specific application of a general legal theme that form should not prevail over substance.   The "lease" in Williams v. Walker Thomas Furniture, which we study for different reasons, is an example.  Conversely, "true leases" are not governed by Article 9.

     Important questions turn on whether a transaction is characterized as a true lease or a lease intended as security.  The rights and obligations of true lessors in relation to defaulting lessees may well be different from the rights and obligations of a secured party under Part 5 of Article 9 (beginning with U.C.C. 9-601).   For example, a true lessor may be able to hold a defaulting lessee liable for the entire amount of the remaining obligation on a lease without attempting to relet the property to mitigate the loss, but, absent strict foreclosure under U.C.C. 9-620 (which is unavailable in some cases where the collateral is consumer goods), a secured party is entitled to a deficiency only following a commercially reasonable sale (U.C.C. 9-615(d)(2), U.C.C. 9-626) or, under some state consumer protection law, may not be entitled to any deficiency following a foreclosure sale (see Problem.Deficiency).  Moreover, a true lessor's rights in property subject to a lease, as against other claimants to the same property (creditors, buyers, or trustee in bankruptcy), are not constrained by the perfection requirements and priority rules of Article 9.

     Purported leases involving the transfer of possession of personal property from one party to another are often considerably more complicated than the illustration given above; hence, a conclusion about whether such leases are true leases or are security interests governed by Article 9 can be difficult. To reach a conclusion, we do not simply ask the parties what they subjectively intended. Rather, U.C.C. 1-201(37) requires application of a lengthy set of criteria.  Earp v. Earp addresses the same question in the context of real property, without the benefit of statutory criteria. 

     Note that U.C.C. 9-505 permits parties to file a financing statement identifying the parties to a transaction as "lessor" and "lessee" without prejudice to a later argument, if necessary, that the "lease" was a true lease and the filing was simply precautionary.