Arkansas Code Annotated

Ark. Code Ann. § 4-1-203 (2026)

Lease distinguished from security interest

✓ current as of May 2026

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Whether a transaction in the form of a lease creates a lease or security interest is determined by the facts of each case.
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.
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.
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.
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.

History. Acts 2005, No. 856, § 12.

Publisher's Notes. Former § 4-1-203, concerning obligation of good faith, was repealed by Acts 2005, No. 856, § 10. The former section was derived from Acts 1961, No. 185, § 1-203; reen. 1967, No. 303, § 2 (1-203); A.S.A. 1947, § 85-1-203. For current law, see § 4-1-304.

Case Notes

Sale.

Where the debtor-in-possession asserted it had an option to purchase three tractors that was directly contradicted by the express terms of the parties' agreement, the debtor was required to accept or reject the lease under 11 U.S.C. § 365. A terminal rental adjustment clause did not create a purchase option under § 4-2A-110. Even the presence of a combination of the factors listed in subsection (c) of this section does not conclusively prove that an agreement is a sale instead of a lease. In re Double G Trucking of the Arklatex, Inc., 432 B.R. 789 (Bankr. W.D. Ark. 2010).

Security Interest.

Question of whether a lease of personal property is a conditional sale contract depends on the intent of the parties and inclusion of an option to purchase does not of itself make a sale contract. In re Shell, 390 F. Supp. 273 (E.D. Ark. 1975).

Lease with option to buy held to be security interest. In re Shell, 390 F. Supp. 273 (E.D. Ark. 1975); General Elec. Credit Corp. v. Bankers Com. Corp., 244 Ark. 984, 429 S.W.2d 60 (1968).

Factors which distinguish a lease from a secured transaction include: (1) whether the financing agent is also a manufacturer or dealer; (2) whether a down payment is required; (3) whether the lessee must bear the risk of loss; (4) whether the lessee has an option to purchase at the end of the lease term and, if so, whether the purchase may be for little or no additional consideration; (5) whether the lessor, upon the lessee's default under the lease, has a right to declare all lease payments due and payable (similar to a mortgagee's foreclosure rights); (6) whether the lessee must pay sales taxes; (7) whether financing statements or additional security instruments are completed regarding the transaction; and (8) whether a sales price for the purchase was established at the outset of the lease. Thus, agreement was not a lease, but a conditional sales contract and a secured transaction, where the agreement provided for a down payment at the start of the “lease”, the weekly payments included sales tax of approximately the current Arkansas sales tax rate, all risk of loss fell upon the “lessee”, the “lessee” was expressly provided an option to purchase which could be exercised only at a specific time, and, in the lease, the purchase price for the option was established at the outset, which precluded consideration of the actual fair market value of the television at the end of the term. In re Brown, 82 B.R. 68 (Bankr. W.D. Ark. 1987).

A transaction would be construed as a sale and security interest as a matter of law where there was no agreement that the debtor could terminate the lease and the debtor became the owner of the trailer at issue at the end of the lease term for the sum of one dollar. In re Macklin, 236 B.R. 403 (Bankr. E.D. Ark. 1999).

The statute does not require a finding as a matter of law that a transaction is a true lease based only on the fact that the lessee may terminate the lease at any time. In re Copeland, 238 B.R. 801 (Bankr. E.D. Ark. 1999).

A transaction by the debtor involving a portable warehouse was a lease, rather than a sale subject to a security interest, where the debtor invested little in the transaction at its inception and the supplier of the portable warehouse assumed the risk that the “sale” would be lost if the debtor terminated the lease, notwithstanding that the transaction involved a relatively small sum of money and after only a brief period, the debtor's investment in the building would make it economically foolish to terminate the lease. In re Copeland, 238 B.R. 801 (Bankr. E.D. Ark. 1999).

Notes of Decisions

Cited in 11 cases, 1989–2010 · leading case: Gordon v. Planters & Merchants Bancshares, Inc., 935 S.W.2d 544 (Ark. 1996).

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Gordon v. Planters & Merchants Bancshares, Inc., 935 S.W.2d 544 (Ark. 1996). · cites it 8× “The majority relies upon the duty of good faith in Ark.Code Ann. § 4-1-203. However, the official comment to § 4-1-203 states that this section "does not support an independent cause of action for failure to perform or enforce in good faith.”

Country Corner Food & Drug, Inc. v. First State Bank & Trust Co of Conway, 966 S.W.2d 894 (Ark. 1998). · cites it 4× “Yet, in Gordon, this court considered the duty of good faith as set out by Ark. Code Ann. § 4-1-203 (Repl. 1991), only in terms of considering whether punitive damages were allowable in that case.”

Bank of Am., N.A. v. C.D. Smith Motor Co., 106 S.W.3d 425 (Ark. 2003). · cites it 2× “Smith’s cross-appeal, wherein Smith first contends that the trial court was wrong in ruling that the Bank was not subject to punitive damages.”

Ripplemeyer v. Nat'l Grape Co-Op. Ass'n, Inc., 807 F. Supp. 1439 (W.D. Ark. 1992). · cites it 2× “Defendants then reiterate their belief that National was well within its rights in terminating the marketing agreements and that plaintiffs have no evidence of bad faith on the part of National.”

Tradax Am., Inc. v. First Nat'l Bank in Stuttgart (In Re Howell Enter., Inc.), 105 B.R. 494 (Bankr. E.D. Ark. 1989). · cites it 2× “The result achieved here appears to be the result intended by the drafters of the Uniform Commercial Code.”

Zeno Buick-GMC, Inc. v. GMC Truck & Coach, 844 F. Supp. 1340 (E.D. Ark. 1992). · cites it 2× “Finally, it is undisputed that checks issued by Zeno Buiek to GMAC pursuant to the Wholesale Security Agreement were returned for insufficient funds and thereafter GMAC repossessed Zeno’s inventory and placed the dealership on “COD” status.”

Affiliated Foods Sw., Inc. v. Moran, 912 S.W.2d 8 (Ark. 1995). · cites it 2× “Arkansas Code Annotated § 4-1-203 (Repl. 1991) provides: “Every contract or duty within this subtitle imposes an obligation of good faith in its performance or enforcement.”

Adams v. First State Bank, Beebe, 778 S.W.2d 611 (Ark. 1989). “Arkansas Code Annotated §4-1-203 (1987) states: “Every contract or duty within this subtitle imposes an obligation of good faith in its performance or enforcement.”

In Re Double G Trucking of the Arklatex, Inc., 432 B.R. 789 (Bankr. W.D. Ark. 2010). · cites it 2× “Section 4-1-203 was formerly numbered Section 4-1-201(37), which was adopted in 1993.”

TCBY Sys., Inc. v. RSP Co., 33 F.3d 925 (8th Cir. 1994). “1992) (citing Ark.Code Ann. § 4-1-203 (Miehie 1987); Restatement (Second) of Contracts § 205 (1981)).”

S. Implement v. Deere & Co. (8th Cir. 1997). “Ark. Code Ann. § 4-1-203 . To establish a breach of that obligation, the plaintiff must demonstrate that the defendant was not honest in fact and that he acted with a bad motive.”

Annotations are extracted automatically from the opinions in the Syfert caselaw corpus and ranked by authority, recency, and treatment. Dots show Syfertize treatment of the citing case itself.