Kentucky Revised Statutes

Ky. Rev. Stat. § 355.1-203 (2026)

Lease distinguished from security interest

✓ current as of May 2026

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

(2) 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:

(a) The original term of the lease is equal to or greater than the remaining economic life of the goods;

(b) 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;

(c) 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

(d) 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.

(3) A transaction in the form of a lease does not create a security interest merely because:

(a) 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;

(b) The lessee assumes risk of loss of the goods;

(c) The lessee agrees to pay, with respect to the goods, taxes, insurance, filing, recording, or registration fees, or service or maintenance costs;

(d) The lessee has an option to renew the lease or to become the owner of the goods;

(e) 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

(f) 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.

(4) 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:

(a) 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

(b) 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.

(5) 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. Effective: July 12, 2006 History: Repealed and reenacted 2006 Ky. Acts ch. 242, sec. 11, effective July 12, 2006. -- Created 1958 Ky. Acts ch. 77, sec. 1-203, effective July 1, 1960.

Notes of Decisions

Cited in 17 cases (1 in the last 5 years), 1964–2021 · leading case: Ranier v. Mount Sterling Nat'l Bank, 812 S.W.2d 154 (Ky. 1991).

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Ranier v. Mount Sterling Nat'l Bank, 812 S.W.2d 154 (Ky. 1991). · cites it 2× “17A Am Jur2d Contracts section 380; KRS 355.1-203. Indeed, it may be said that contracts impose on the parties thereto a duty to do everything necessary to carry them out.”

RAM Eng'g & Constr., Inc. v. Univ. of Louisville, 127 S.W.3d 579 (Ky. 2003). · cites it 2× “"Good faith" shall mean honesty in fact *585 in the conduct or transaction concerned and the observance of reasonable commercial standards of fair dealing.”

Delphi Auto. Sys., LLC v. Capital Cmty. Econ./Indus. Dev. Corp., 434 S.W.3d 481 (Ky. 2014). · cites it 4× “KRS 355.1-203, entitled “Lease distinguished from security interest,” provides in relevant part: (1) Whether a transaction in the form of a lease creates a lease or security interest is determined by the facts of each case.”

First & Farmers Bank of Somerset, Inc. v. Henderson, 763 S.W.2d 137 (Ky. Ct. App. 1988). · cites it 2× “Initially, there must be good faith in declaring the default. Then, the right to repossess becomes operative.”

In re Purdy, 490 B.R. 530 (Bankr. W.D. Ky. 2013). · cites it 3× “Under the statute, a transaction 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.”

A & a Mech., Inc. v. Thermal Equip. Sales, Inc., 998 S.W.2d 505 (Ky. Ct. App. 1999). “1-102; KRS 355.1-203. Parties wishing to disclaim UCC provisions may, to a limited extent, do so, but deviations from the Code and from the presumptions underlying it should be clearly expressed.”

Kentucky Utils. Co. v. South East Coal Co., 836 S.W.2d 392 (Ky. 1992). · cites it 2× “' However, we conclude that KU was obligated under KRS 355.1-203 to use good faith in invoking force majeure.”

Peacock v. Damon Corp., 458 F. Supp. 2d 411 (W.D. Ky. 2006). “§ 355.1-203 does impose an obligation of good faith in the performance of any contract or duty within the Kentucky Uniform Commercial Code.”

Fort Knox Nat'l Bank v. Gustafson, 385 S.W.2d 196 (Ky. Ct. App. 1964). “See KRS 355.1-203. “Good faith,” as defined in the Uniform Commercial Code, “means honesty in fact in the conduct or transaction concerned.”

Universal C. I. T. Credit Corp. v. Middlesboro Motor Sales, Inc., 424 S.W.2d 409 (Ky. Ct. App. 1968). “This requirement, KRS 355.1-203, is “Every contract or duty within this chapter imposes an obligation of good faith in its performance or enforcement.”

Star Bank, Kenton Cnty., Inc. v. Parnell, 992 S.W.2d 189 (Ky. Ct. App. 1998). “See KRS 355.1-203. “Good faith,” as defined in the Uniform Commercial Code, “means honesty in fact in the conduct or transaction concerned.”

Chernick v. Casares, 759 S.W.2d 832 (Ky. Ct. App. 1988). ““The Uniform Commercial Code imposes a duty of good faith upon all its transactions [KRS 355.1-203]; a delay ... by the buyer in informing the seller of his intended revocation is insufficient compliance with the good faith obligation.”

Show all 17 citing cases →

— Ky. Rev. Stat. § 355.1-203(2) — 3 cases

In re Purdy, 490 B.R. 530 (Bankr. W.D. Ky. 2013). “Under the statute, a transaction 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.”

Delphi Auto. Sys., LLC v. Capital Cmty. Econ./Indus. Dev. Corp., 434 S.W.3d 481 (Ky. 2014). “KRS 355.1-203, entitled “Lease distinguished from security interest,” provides in relevant part: (1) Whether a transaction in the form of a lease creates a lease or security interest is determined by the facts of each case.”

Magdovitz Fam. Trust v. KY USA Energy, Inc. (In Re KY USA Energy, Inc.), 449 B.R. 745 (Bankr. W.D. Ky. 2011).

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