Section 1-203 - Lease distinguished from security interest(a) Whether a transaction in the form of a lease creates a lease or security interest is determined by the facts of each case.(b) A transaction creates a security interest if the consideration that the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease not subject to termination by the lessee, and:(1) the original term of the lease is equal to or greater than the remaining economic life of the goods;(2) the lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods;(3) the lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement; or(4) the lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement.(c) A transaction in the form of a lease does not create a security interest merely because:(1) the present value of the consideration the lessee is obligated to pay the lessor for the right to possession and use of the goods is substantially equal to or is greater than the fair market value of the goods at the time the lease is entered into;(2) the lessee assumes risk of loss of the goods;(3) the lessee agrees to pay, with respect to the goods, taxes, insurance, filing, recording, or registration fees, or service or maintenance costs;(4) the lessee has an option to renew the lease or to become the owner of the goods;(5) the lessee has an option to renew the lease for a fixed rent that is equal to or greater than the reasonably predictable fair market rent for the use of the goods for the term of the renewal at the time the option is to be performed; or(6) the lessee has an option to become the owner of the goods for a fixed price that is equal to or greater than the reasonably predictable fair market value of the goods at the time the option is to be performed.(d) Additional consideration is nominal if it is less than the lessee's reasonably predictable cost of performing under the lease agreement if the option is not exercised. Additional consideration is not nominal if: (1) when the option to renew the lease is granted to the lessee, the rent is stated to be the fair market rent for the use of the goods for the term of the renewal determined at the time the option is to be performed, or(2) when the option to become the owner of the goods is granted to the lessee, the price is stated to be the fair market value of the goods determined at the time the option is to be performed.(e) The "remaining economic life of the goods" and "reasonably predictable" fair market rent, fair market value, or cost of performing under the lease agreement must be determined with reference to the facts and circumstances at the time the transaction is entered into.Okla. Stat. tit. 12A, § 1-203
Laws 1961, p. 73, § 1-203; Amended by Laws 2005 , HB 2028, c. 139, § 10, eff. 1/1/2006.Oklahoma Code Comment
The language of old section 1-203 was moved to revised section 1-304 . Revised section 1-203 is based on old section 1-201(37)(b), (c) and (d) . Whether a lease is in law a secured transaction is constantly litigated. Aside from Oklahoma cases, there are cases worth noting from other jurisdictions. Among them is the Arnold Machinery case.
In Arnold Machinery Co. v. Balls, 624 P.2d 678, 34 UCC 236 (Utah 1981), the defendant leased a backhoe from the plaintiff for a minimum of six months and thereafter until either party terminated the lease relationship. The parties had a purchase option agreement whereby the lessee could purchase the backhoe for the full purchase price, plus a 1.25 percent monthly purchase option charge, plus the cost of any repairs during the lease period, plus any taxes paid during the lease period, less a 100 percent credit for all rentals paid. The court ruled that this transaction constituted a true lease. Assuming, reasonable depreciation, the purchase option price could be greater than or equal to the reasonably predictable fair market value of the backhoe at the time of the option was exercised. Thus, it is not a foregone conclusion that the lessee would exercise the option. If the backhoe depreciated more than expected, the lessee would not exercise the option and the lessor would receive less than his expected residual value. If, on the other hand, the backhoe depreciated less than expected, or even appreciated, the lessee is likely to exercise the option. In In re J.A. Thompson & Son, Inc., 665 F.2d 941, 33 UCC 356 (9th Cir. 1982), the lessee leased equipment with a purchase option agreement whereby the equipment could be purchased for a specified price plus a 5 1/2 percent per annum "add-on charge" less a 100 percent credit for rents paid. The court held this made the transaction a secured sale as little additional consideration was required to exercise the option. The court should have compared the expected value with the option price.