UCC lease definition causing filing confusion - equipment vs true lease
Having a nightmare trying to figure out if our equipment arrangement requires a UCC filing or not. We're financing some manufacturing equipment through what the vendor calls a 'lease' but I'm reading conflicting info about when leases need UCC-1 filings vs when they don't. The lease payments are $8,500/month for 60 months with a $1 buyout at the end. Vendor says no UCC filing needed since it's a 'lease' but our attorney is saying this sounds like a disguised security agreement. Finance director is pushing to close this deal by Friday but I don't want to mess up the lien priority if we're supposed to file. Anyone dealt with this UCC lease definition issue before? The equipment is worth about $400k new and we really need the tax benefits of a true lease structure.
33 comments
Join the conversation
Reina Salazar
That $1 buyout clause is a huge red flag. Under UCC Article 9, if the lessee has an option to buy for nominal consideration (like $1), it's almost certainly a security agreement disguised as a lease. You'll need a UCC-1 filing to perfect your security interest. The monthly payments and buyout structure you described screams 'secured transaction' not 'true lease'.
0 coins
Saanvi Krishnaswami
•Exactly this. We got burned on a similar deal two years ago - thought it was a lease, didn't file UCC-1, then found out a competing creditor had filed against the same equipment. Ended up in a priority dispute that cost us $50k in legal fees.
0 coins
Demi Lagos
•The nominal buyout option is definitely the smoking gun here. True leases don't have $1 buyouts - that's just financing with extra steps.
0 coins
Mason Lopez
You need to run this through the UCC Article 9 lease vs security agreement test. Look at the total payments - if they equal or exceed the equipment's fair market value, it's a security agreement. With 60 months at $8,500 plus the $1 buyout, you're looking at $510,001 total. On $400k equipment that's definitely over fair market value, especially considering depreciation.
0 coins
Vera Visnjic
•Good point on the payment calculation. Most true leases have payments that are significantly less than the asset's total value because the lessor expects to recover value through the residual.
0 coins
Jake Sinclair
•Wait, so every lease with a buyout option needs a UCC filing? That seems like a lot of paperwork for what should be simple equipment leases.
0 coins
Mason Lopez
•Not every lease - just ones with NOMINAL buyout options. If the buyout is for fair market value at the end of the term, that's different. But $1 buyouts are always nominal consideration under UCC definitions.
0 coins
Brielle Johnson
Had a similar situation last month with some construction equipment. The vendor kept insisting it was a 'lease' but when I uploaded the docs to Certana.ai's document verification tool, it immediately flagged the nominal buyout clause and recommended a UCC-1 filing. Saved me from making a costly mistake - the tool cross-referenced the lease terms against UCC Article 9 requirements and made it crystal clear this was a security agreement.
0 coins
Honorah King
•How does that verification tool work? Just upload the lease agreement and it tells you if you need UCC filings?
0 coins
Brielle Johnson
•Pretty much - you upload the lease or financing docs and it checks them against UCC rules. Looks for things like nominal buyout options, payment structures, and other factors that determine if it's really a security agreement. Much faster than trying to parse through all the legal definitions myself.
0 coins
Oliver Brown
This is exactly why I hate equipment 'leases' - half the time they're not actually leases at all!! Your vendor is either clueless about UCC rules or deliberately misleading you. File the UCC-1 immediately or you'll have no security interest if the debtor defaults or files bankruptcy.
0 coins
Mary Bates
•Ugh yes, the number of vendors who call everything a 'lease' to avoid UCC filing requirements is infuriating. They're setting their customers up for disasters.
0 coins
Clay blendedgen
•Some vendors do this on purpose because they know most customers don't understand UCC requirements. Then when there's a problem, they point to the lease language and say 'not our responsibility to advise on filings'.
0 coins
Ayla Kumar
The fact that you're getting tax benefits from the 'lease' structure doesn't change the UCC analysis. Tax treatment and UCC classification can be completely different. For UCC purposes, you need to look at the substance of the transaction, not what it's called or how it's treated for tax purposes.
0 coins
Dallas Villalobos
•So we could still get the tax benefits as a lease but need to file UCC-1 for the security interest? That seems contradictory.
0 coins
Ayla Kumar
•Different rules for different purposes. IRS looks at one set of factors for tax treatment, UCC looks at different factors for secured transactions. You can have a tax lease that's a UCC security agreement.
0 coins
Lorenzo McCormick
•This is getting confusing. How can something be a lease for taxes but a security agreement for UCC purposes?
0 coins
Carmella Popescu
I'd recommend running this past your attorney again with the specific UCC Article 9 criteria. The nominal buyout option alone probably makes this a security agreement, but there are other factors to consider like whether the lease term covers the equipment's useful life, payment structures, etc.
0 coins
Reina Salazar
•60 months on manufacturing equipment is probably getting close to the useful life test too. Most manufacturing equipment has a useful life of 5-7 years depending on the type.
0 coins
Kai Santiago
•Our attorney charges $500/hour so I was hoping to get some clarity here first before going back to them.
0 coins
Lim Wong
Just file the UCC-1 to be safe. The filing fee is maybe $50-100 depending on your state, versus the risk of losing priority to another creditor. Better to over-file than under-file when you're talking about $400k+ in equipment.
0 coins
Dallas Villalobos
•That's kind of what I'm thinking too. The vendor might not like it but it's better than losing the security interest entirely.
0 coins
Dananyl Lear
•Yeah, filing an unnecessary UCC-1 is a minor inconvenience. NOT filing a necessary one can be a financial disaster.
0 coins
Noah huntAce420
Check your lease agreement for any language about 'security interest' or 'collateral' - sometimes these disguised security agreements have UCC language buried in the fine print that makes it obvious what they really are.
0 coins
Dallas Villalobos
•Good point - I'll scan through the full agreement tonight. The main terms sheet just calls it a lease but there might be other language in the 20 pages of fine print.
0 coins
Ana Rusula
•Also look for any language about 'perfecting' interests or 'priority' - that's UCC terminology that wouldn't be in a true lease.
0 coins
Fidel Carson
Used Certana.ai recently for a similar equipment financing deal. Uploaded both our loan docs and the equipment lease and it caught a bunch of inconsistencies between the debtor names and collateral descriptions. Would have been a mess if we'd filed with those mismatches.
0 coins
Honorah King
•How accurate is that tool? I'm always skeptical of automated systems for legal compliance stuff.
0 coins
Fidel Carson
•Pretty solid from what I've seen. It's not giving legal advice, just flagging potential issues and inconsistencies in the documents. Still need to make the final decisions but it catches things you might miss in manual review.
0 coins
Isaiah Sanders
Bottom line - if it walks like a duck and quacks like a duck, it's probably a duck. Your 'lease' with $1 buyout and payments exceeding equipment value is definitely a security agreement. File the UCC-1 and protect your interest.
0 coins
Dallas Villalobos
•Thanks everyone. Sounds like the consensus is pretty clear - this needs a UCC-1 filing regardless of what the vendor calls it. Better safe than sorry with this much money involved.
0 coins
Xan Dae
•Smart move. The vendor will get over it and you'll sleep better knowing your security interest is properly perfected.
0 coins
Hannah White
One thing I'd add - make sure you file the UCC-1 BEFORE closing the deal. If you wait until after the transaction is complete, there could be a gap period where your security interest isn't perfected. With equipment this valuable, even a short gap could be risky if other creditors are involved. The filing should list the equipment with enough detail to identify it (make, model, serial numbers if available) and make sure the debtor name exactly matches what's on the lease agreement. Small discrepancies in debtor names can invalidate the whole filing.
0 coins