§ 41-01-11 — (1-203) Lease distinguished from security interest

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;
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 that consideration 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.