Lease Requirements

A lease is a transfer of the right to possession and use of goods for a term in return for consideration, but a sale, including a sale on approval or a sale or return, or retention or creation of a security interest is not a lease. (Ga. Code Ann., § 11-2A-103) If a court as a matter of law finds a lease contract or any clause of a lease contract to have been unconscionable at the time it was made the court may refuse to enforce the lease contract, or it may enforce the remainder of the lease contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result. (Ga. Code Ann., § 11-2A-108) A transaction in the form of a lease creates a security interest if the consideration that the lessee is to pay to 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: the original term of the lease is equal to or greater than the remaining economic life of the goods; 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; 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 the lessee has an option to become the owner of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement. (Ga. Code Ann., § 11-1-203)

A lease agreement will be held to be a true lease rather than a security agreement if two requirements are met: (1) “the lessor ‘clearly owns the property’ while the lessee only has the right to use the goods until the end of the term” and (2) the lessee’s option to purchase the goods at the end of the lease term requires consideration consistent with the fair market value of the goods at the time the option is to be performed. In re Paschal, 619 B.R. 278 (Bankr. M.D. Ga. 2020)

It's important to consider what the lease's end of lease terms include, as nominal purchase prices that do not provide for fair market value purchase of the leased goods/equipment could cause the lease to be interpreted as a disguised financing agreement instead of a true lease.