Sales and Leases - A Problem-based Approach, 2016a

The fourth test is to determine whether the lessee has an option to become the
owner of the goods for no additional consideration or for nominal additional
consideration.
20.3.3. Application of the foregoing tests requires an analysis of the “remaining economic
life” of the leased property and whether the consideration to be paid under a purchase or
renewal option is "nominal.”
20.3.3.1. Section 1-203(d) provides that additional consideration is nominal if it
is less than the lessee’s reasonably predictable cost of performing if the option is
not exercised. Additional consideration is not nominal if the renewal rental or
optional purchase price is based upon predicted fair market values at the time the
option is to be performed.
20.3.3.2. Section 1-203(e) provides that “remaining economic life” and “fair
market value” are determined with reference to the facts and circumstances at the
time the transaction is entered into.
20.3.4. Finally, § 1-203 sets forth certain factors which do not, in and of themselves, turn
a lease into a sale with a retained security interest. For example, if the lessee agrees to
assume the risk of loss of the goods, or to pay insurance and maintenance costs during the
term of the lease (normally an incident of ownership), these facts alone do not make the
purported lease a disguised sale.
20.3.5. The § 1-203 factors are discussed at length in E. Carolyn Hochstadter Dicker &
John P. Campo, FF&E and the True Lease Question: Article 2A and Accompanying
Amendments to UCC Section 1-201(37), 7 Am. Bankr. Inst. L. Rev. 517 (1999).
Problem 20-1. As graduation day approaches, you decide to acquire your dream car, a 2008
Volkswagen 2.0 turbo Passat, which retails for $24,975. Since you don’t have that much cash
now, and you don’t want to borrow any more money until you make a dent in your law school
loans, you consider a lease on the following terms: $399.00/month for 36 months, plus an upfront
payment of $2,000. As lessee, you would be responsible for insurance, maintenance and
repairs. At the end of the 36-month lease, you will have an option to purchase the vehicle or
return it to the dealer. Considering the following variables, is this a “lease” governed by Article
2A, or a “disguised security interest sale” governed by Articles 2 and 9?
1. You can cancel the lease at any time during the 36 month period, as long as you pay a $1,000
fee for early termination.
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