The Kentucky Legislature on Wednesday, March 28, passed TRALA-requested legislation, clearing the way for lessors to better appreciate the benefits of TRAC leasing in Kentucky. Kentucky Senate Bill 97, as amended, addresses concerns of TRALA members about maintaining the correct and accepted definitions of what a TRAC lease is and how it should operate. The bill passed the House by a vote of 88-8. Just last month, the state Senate passed the same legislation by a vote of 37-0.
Terminal rental adjustment clauses permit or require an up or down adjustment of rent to make up for any difference between the projected value of a vehicle and its actual value upon lease termination. The objective of these leases is to provide a financial incentive for the lessee to control the maintenance of the vehicle and keep the vehicle in good repair. TRAC vehicle leasing is limited by federal tax law (26 U.S.C. 7701(h)) to commercial leases only.
TRAC statutes have been passed in 48 states and the District of Columbia ― leaving only Kentucky and New Mexico yet to enact clarification legislation, TRALA says. These statutes have made it clear that TRAC vehicle leases are true leases and not sales or security interests for state law, according to TRALA.
TRALA says the impact of TRAC statutes has proved helpful to its members in bankruptcy cases by supporting the “true lease” status of TRAC leases when the lessee is in Chapter 11 bankruptcy reorganization. True lease status gives the lessor a greater right to recover full current rental payments from a bankrupt lessee, and it may entitle the lessor – unlike a secured creditor – to return of the vehicle so that it can be released to another lessee.
SB 97 now moves to the governor’s desk for his signature, and TRALA does not anticipate any opposition to the governor signing the bill into law. The TRAC legislation is expected to take effect on July 1.
