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Illinois Compiled Statutes

810 ILCS 5/1-203 (2026)

Lease distinguished from security interest

✓ current as of May 2026
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(810 ILCS 5/1-203) (from Ch. 26, par. 1-203)
    Sec. 1-203. Lease distinguished from security interest.
    (a) Whether a transaction in the form of a lease creates a lease or security interest is determined by the facts of each case.
    (b) 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.
    (c) 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.
    (d) 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.
    (e) 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.
(Source: P.A. 95-895, eff. 1-1-09.)

    
Notes of Decisions
Cited in 9 cases, 1997–2019 · leading case: Falk v. N. Trust Co., 763 N.E.2d 380 (Ill. App. Ct. 2001).
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Falk v. N. Trust Co., 763 N.E.2d 380 (Ill. App. Ct. 2001). “In addition, we agree with the plaintiff that under the UCC every contract or duty contains an obligation of "good faith" in its performance or enforcement, therefore, the Bank was required to pay the items in "good faith.”
Oil Express Nat'l, Inc. v. Burgstone, 958 F. Supp. 366 (N.D. Ill. 1997). “See also 810 ILCS 5/1-203 (imposing a good-faith obligation on every contract under the Uniform Commercial Code).”
Brackett v. Galesburg Clinic Ass'n, 689 N.E.2d 406 (Ill. App. Ct. 1997). “Moreover, even if were to find that some of defendant's actions were unintentional, plaintiff has failed to properly allege the existence of a legal duty that was breached by defendants. Plaintiff claims that defendants violated the duty of employers to treat their employees…”
Smc Corp., Ltd. v. Lockjaw, LLC, 481 F. Supp. 2d 918 (N.D. Ill. 2007). “See 810 ILCS 5/1-203 (“Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.”
GreatAmerica Leasing Corp. v. Cozzi Iron & Metal Inc., 76 F. Supp. 2d 875 (N.D. Ill. 1999). “See 810 ILCS 5/1-203 cmt. Cozzi does not adequately explain what the alleged breach of the covenant consisted in beyond the breach of the supposed oral understanding between the parties, or what available remedies for a breach of the covenant it seeks.”
Royal T Energy, LLC v. ENGS Com. Fin. Co. (In re Royal T Energy, LLC), 596 B.R. 525 (Bankr. E.D. Tex. 2019). · cites it 2× “han 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…”
Adams v. Greg Weeks, Inc. (Ill. App. Ct. 2002). “See 810 ILCS 5/1-103 (West 2000) (unless displaced by specific provisions of the UCC, the principles of law and equity act as a supplement); 810 ILCS 5/1-203 (West 2000) (requires good faith in all UCC transactions).”
Hill v. St. Paul Fed. Bank for Sav. (Ill. App. Ct. 2002). “” 6 Hawkland UCC Series §4-303:2 (2001). Plaintiffs argue that section 4-303(b) must be read in conjunction with UCC section 1-203, which requires that “[e]very contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.”
Midwest Builders v. Lord & Essex (Ill. App. Ct. 2007). “810 ILCS 5/1-203 (West 2006); Resolution Trust Corp.”
— 810 ILCS 5/1-203(b) — 1 case
Royal T Energy, LLC v. ENGS Com. Fin. Co. (In re Royal T Energy, LLC), 596 B.R. 525 (Bankr. E.D. Tex. 2019). “han 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…”
— 810 ILCS 5/1-203(c) — 1 case
Royal T Energy, LLC v. ENGS Com. Fin. Co. (In re Royal T Energy, LLC), 596 B.R. 525 (Bankr. E.D. Tex. 2019). “han 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…”
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