Document type: Checklist Practice area: Commercial — Equipment Finance Jurisdiction: United States Last reviewed: 5 September 2026

Section 1 — The bright-line test

Limb (a):

  • Is the lessee's obligation to pay for the term not subject to termination by the lessee? (Almost always yes.)

Limb (b) — any one of these makes it a security interest:

  • Original term equal to or greater than the remaining economic life of the goods?
  • Lessee bound to renew for the remaining economic life or to become the owner?
  • Lessee has an option to renew for the remaining economic life for nominal consideration?
  • Lessee has an option to become the owner for nominal consideration?

If (a) and any of (b): security interest, as a matter of law. Stop.

Nominality:

  • Is the option price less than the lessee's reasonably predictable cost of not exercising? → nominal
  • Is the price stated as fair market value determined at the time of exercise? → not nominal
  • Fixed price: would a rational lessee have no sensible alternative but to exercise?
  • Price as a percentage of original cost: at or above ~10% with genuine residual value is generally defensible; at 1% it is nominal

Remaining economic life:

  • Renewal options included in the term calculation?
  • Economic life supported by evidence — manufacturer data, lessor experience, industry data, appraisal?
  • Determined at inception, and not confused with tax depreciable life or accounting useful life?

Section 2 — Economic realities (if the bright-line test is not met)

The central question: has the lessor retained a meaningful residual interest with genuine risk?

  • Will the equipment have substantial value at the end of the term?
  • Does the lessor bear the risk of the residual?
  • Does the rent return the lessor's full cost plus a return, leaving nothing dependent on the residual?
  • Is there a terminal rent adjustment clause? (Strong indicator of a security interest.)
  • Is there a lessee residual guarantee or a remarketing obligation? (Same.)
  • Does the lessee bear the entire risk of loss and obsolescence?

These factors do NOT, by themselves, create a security interest (the Code says so):

  • Present value of rent equals or exceeds fair market value
  • Lessee bears risk of loss, taxes, insurance, filing fees, maintenance
  • Lessee has an option to renew or purchase
  • Option to renew at fixed rent equal to or above predictable fair market rent
  • Option to purchase at a fixed price equal to or above predictable fair market value

Section 3 — Structuring for a true lease

  • Term well inside remaining economic life, renewals counted
  • Purchase option at fair market value determined at exercise, or a fixed price at or above predicted residual with a contemporaneous residual analysis on file
  • Consider a capped fair market value option — preserves characterization, gives the lessee certainty
  • Residual assumption documented with a source: lessor remarketing history, published guides, appraisal
  • Residual of roughly 15–35% of cost for equipment with an established secondary market
  • No terminal rent adjustment clause
  • No lessee residual guarantee or remarketing obligation
  • Third-party residual guarantees or insurance reviewed, but generally compatible
  • Avoid entirely: $1 options; nominal fixed options; obligations to purchase

Section 4 — Finance lease requirements

  • Lessor did not select, manufacture, or supply the goods
  • Lessor acquired the goods or the right to possession in connection with the lease
  • One of these before the lessee signs:
    • Lessee receives a copy of the supply contract; or
    • Lessee's approval of the supply contract is a condition; or
    • Lessee receives an accurate statement of the supplier's promises and warranties and of its rights against the supplier
  • Receipt acknowledged in the acceptance certificate
  • Lease contains a lessor warranty disclaimer, conspicuous, excluding merchantability and fitness
  • Supplier warranties assigned or enforceable by the lessee
  • Hell or high water clause included
  • Lessee acknowledges it selected the equipment and the supplier
  • Note: a captive lessor affiliated with the manufacturer is not a finance lessor — the statutory protections do not apply

Section 5 — Acceptance

  • Certificate per schedule
  • States delivery, inspection, conformity to specification, opportunity to test, receipt of supply contract or warranty summary, and irrevocable acceptance
  • Executed by a person with authority who understands its effect — not by a receiving clerk
  • Lessee-side: acceptance period after delivery negotiated
  • Lessee-side: acceptance conditioned on installation and a defined acceptance test
  • Lessee-side: where the supplier installs, acceptance tied to the supplier's completion certificate
  • Lessor-side: longstop date after which acceptance is deemed to occur
  • Interim rent for any commissioning period documented

Section 6 — Risk provisions

  • Insurance certificates received before funding: property at full replacement value with lessor as loss payee; liability with lessor as additional insured; 30 days' notice of cancellation
  • Coverage adequate to stipulated loss values
  • Force-placement right on lapse
  • Renewal dates diarized
  • Risk of loss on the lessee from delivery
  • Casualty: stipulated loss value payable; insurance proceeds credited
  • Stipulated loss schedule attached, and disposition proceeds credited against it
  • Maintenance to manufacturer standards, by qualified personnel, with records
  • No relocation without consent; no non-removable alterations
  • Tax indemnity reviewed — lessee should resist indemnities for loss of the lessor's tax benefits from events outside its control
  • Quiet enjoyment covenant binding on assignees

Section 7 — Perfection

  • Lien searches in the state of organization and every equipment location
  • Blanket lien releases or subordinations obtained as to the equipment
  • Precautionary UCC-1 filed, stating it is precautionary and not an admission
  • Backup grant of a security interest in the lease — without it, the filing perfects nothing
  • Debtor's exact legal name from the public organic record
  • Title notation for vehicles, trailers, and titled equipment
  • Fixture filing plus mortgagee waiver for fixtures
  • Federal registry for aircraft, vessels, rolling stock; international registry for covered mobile equipment
  • Landlord waiver for leased premises
  • Post-closing search confirming the filing appears
  • Continuation calendared before the five-year lapse

Section 8 — Assignment and chattel paper

  • Lease permits lessor assignment without lessee consent
  • Assignee takes free of lessee defenses against the lessor
  • Quiet enjoyment binding on assignees
  • Notice of assignment to the lessee, with updated payment instructions and insurance loss payee
  • Lessee estoppel certificate for the assignee
  • Original chattel paper marked and delivered — possession generally beats filing between competing assignees
  • Electronic chattel paper: control established under the statutory criteria

Section 9 — End of term (where lessees lose money)

  • Non-renewal notice deadline — negotiate 60–90 days, not 180
  • Automatic renewal limited to month to month
  • Return conditions tied to ordinary wear and tear, not recertification; any required certification at the lessor's cost
  • Return location within a stated radius, or a freight cap
  • Fair market value option supported by a defined appraisal process: who appraises, on what standard (in place and in use), and a tiebreak
  • Option exercise notice period
  • Holdover rent rate
  • All deadlines calendared at signing, in a system that will outlive the person who created it
  • Return costs budgeted twelve months out

Section 10 — Default and enforcement

  • Default notice sent per the lease, with the contractual cure period observed
  • Characterization confirmed — proceed as though Article 9 applies where recharacterization is a real risk
  • Decision made between possession and a payment claim, on realizable value and lessee solvency
  • Repossession without breach of the peace, or by action
  • Disposition commercially reasonable and documented: marketing, buyers contacted, price against appraised value, costs
  • Claim computed clearly, crediting disposition proceeds
  • Bankruptcy filing checked before every repossession
  • If filed: stay observed; § 365 assumption or rejection deadline monitored; post-sixty-day performance sought if a true lease; adequate protection sought if a security interest; proof of claim filed

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