How is equipment leasing secured?

A lease is not a secured transaction and is not subject to Article 9 of the US Uniform Commercial Code (UCC).  Since the lessor of commercial goods, such as equipment, owns the goods, it is not technically necessary for a lessor to perfect a security interest in the collateral.  However, if a leasing transaction is a true lease, it is common for the lessor to file a UCC-1 to establish that a security interest in the leased asset is retained until the lease is paid off and title passes to the lessee/buyer.  Moreover, guarantees and lease assignments are commonly used to secure the funding of leases.  Determination of whether a lease is deemed a security interest largely depends on the facts of each case, including whether the lease contains a bargain purchase option, the lessee’s right to renew the lease or to terminate the lease without substantial penalty.

Equipment in a lease is personal property and under the UCC equipment leases constitute chattel paper.  Such “secured transactions” as leasing, hire purchase and title retention arrangements generally do not require perfection.  However, the recording the agreement does not constitute perfection and an unperfected security interest may be ineffective against the debtor’s trustee in bankruptcy.

Electronic records and signatures are used to document equipment leases and lenders take electronic leases as collateral instead of delivery and physical possession of paper-based leases.  As electronic chattel paper, Revised Article 9 of the Uniform Commercial Code permits a party to perfect a first-priority lien in equipment leases that is evidenced by electronic records and signatures without having to take physical possession of lease documentation or filing a first-in-time financing statement.