Texas Business & Commerce Code - Section 1.203. Lease Distinguished From Security Interest

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§ 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 in the form of a lease 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 and is 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 for 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.

Amended by Acts 2003, 78th Leg., ch. 542, § 1, eff. Sept. 1, 
2003.       

Last modified: August 10, 2007