True Lease

A lease that has the characteristics of an operating lease, as opposed to a lease that has the characteristics of a financing.

Courts look to a number of factors to distinguish “true leases” from leases that are disguised financing transactions. The determination usually hinges on whether the term of the lease is materially less than the useful life of the leased property and whether the lessee must pay the fair market value of the property to acquire it during or at the end of the lease term.

If the agreement is found to be a true lease, then the debtor’s right to modify the terms of the transaction are limited. The debtor may assume or reject the lease but may not (absent the lessor’s consent) modify the terms of the lease. If the lease is found to be a disguised financing, and the lessor-creditor has properly perfected its lien or security interest, the bankruptcy court will treat the “lease” as creating a lien or security interest in favor of the “lessor” and treat the “lessor” as a secured party or mortgagee, with the debtor being treated as owner of the “leased” property. If the lien or security interest was not properly perfected, it may be avoided by the debtor under the strong arm powers, leaving the “lessor”/secured creditor with an unsecured claim.

See also Disguised Financing, Recharacterization, Sale-Leaseback, True Sale.

Email Term