1. Leases Over One Year Must be Registered in all Provinces
In recent years the Ontario Personal Property Security Act
("PPSA") changed the scope of its application to include
all leases for a term of more than one year, regardless of whether
it is a "true" or "financing" lease. This is a
different rule than exists in the United States and one often
missed on cross border transactions. Simply stated, any lease for a
term of one year or more must be registered to safeguard the
lessor's rights in the property. Also note that the one year
rule is broadly defined to include any renewals and possible
The requirement to register was highlighted in Re Scott, 2012
ONSC 4656 (Ont. S.C.J.), which confirmed a lease agreement itself
is a security agreement for PPSA purposes. In this case, a lessor
attempted to claim rights in a leased vehicle following the
lessee's assignment into bankruptcy. The lease was for a term
of more than one year and was not registered. During the bankruptcy
process the lessor collected lease payments and seized the vehicle
upon default. In accordance with s. 20 of the PPSA, which provides
only perfected security interests in collateral will be effective
against a trustee in bankruptcy, the lessor's interest was
subordinate to the trustee. Further, the lessor had no right to
lease payments received following its knowledge of the lessee's
assignment into bankruptcy.
Québec non-registration may not be fatal, but still
lessors should register. An equivalent PPSA provision is found in
all provinces except Québec. Registration in Québec
merely makes the lease opposable by third parties; it is likely an
innocent purchaser of an unregistered leased good may claim the
property against a lessor. In Lefebvre (Trustee of); Tremblay
(Trustee of) 2004 SCC 63, the Supreme Court of Canada stated a
trustee in bankruptcy is not a third party, rather the trustee
steps into the role of the lessee and thereby continues the lease.
The decision of the Quebec Court of Appeal in 9089-3777
Québec Inc. c. Fischer ("Fischer") follows
this logic. In Fischer, a lessor had the right to claim vehicles
subject to an unregistered lease that were seized by the
lessee's unsecured creditors. Lessors should not confuse the
rule in Québec with the rest of Canada, as failure to
register a lease with a term over a year in all other provinces
will cause the lessors rights to be subordinated to the
2. Present Value Termination Clauses are Upheld
Lease agreements may protect lessors through the inclusion of
termination clauses which apply upon a lessee's default. An
insolvency act by the lessee may be included as an event of
default. There has been some debate about whether these clauses
contained in standard form lease agreements are considered penalty
clauses, and therefore unenforceable, or whether they are a
"genuine pre-estimate" of damages incurred upon the
lessee's default. The Ontario Superior Court shed some light on
this issue in Action Auto Leasing & Gallery Inc. v. Boulding
2011 ONSC 7253 ("Action Auto").
At issue in Action Auto was a clause that stated if the vehicle
was returned to the lessor the amount owing would be equal to the
present value of the vehicle upon default by the lessee. Present
value was to be calculated using a discount rate of 5% of the
remaining lease payments, plus the residual value of the vehicle,
less its wholesale value. It was found that this default clause
provided a fair pre-estimate of damages and was therefore
enforceable. Further, the court noted that its decision reflects
the commercial reality that lessors of motor vehicles who must
retail a vehicle upon a lessee's default incur expenses,
including the maintenance of the lot on which the vehicle is
displayed, the carrying costs of the vehicle prior to its sale, the
maintenance of an office to service the lot and the payment of
salespersons to market the vehicle.
Action Auto confirms what many in the leasing community already
believed to be true: where a default clause reflects the present
value of a leased car rather than the entire amount owing on the
lease, courts will likely respect the clause.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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