Motor Vehicle Leasing in Canada: A Guide for U.S. Leasing Professionals

Canada's legal system, much like that of the United States, is a combination of federal and provincial law. The operation and sale of motor vehicles is a provincial, as opposed to federal matter. Similarly, provincial law governs registering security interests in Canada. Unlike in the United States, a Uniform Commercial Code ('UCC') has not been adopted; instead, each province has enacted its own personal property regime, which regimes fortunately, except for Quebec, are substantially similar. This governing act is called the Personal Property Security Act ('PPSA'). Quebec, which has its own origin under French law, has adopted a civil code (much like Louisiana) and has significantly different procedures and policies than the other nine provinces. For this reason, any reference in this article to Canada will mean the nine provinces other than Quebec, often called 'the rest of Canada' or ROC. Further, since most economic activity takes place in the province of Ontario, the focus of this article is Ontario law. It should also be noted that while the PPSA is similar in the ROC, specific motor vehicle(s) regulations and highway traffic act laws can vary significantly from province to province. As mentioned above, Quebec has a separate and distinct legal structure and, as such, no comment will be provided on its particular issues and concerns except as otherwise stated.

This article addresses three particular areas of interest to motor vehicle lessors. The first section discusses the current law with respect to vicarious liability. This section provides some guidance as to the law across Canada, including Quebec. The second part of the article discusses how to register a security interest in motor vehicles and appropriate titling law. The third part focuses on particular regulatory requirements. This section deals strictly with Ontario.

Lastly, it should be noted that this article deals strictly with commercial, as opposed to consumer, finance. Needless to say, there are significant rules in Canada with respect to consumer finance and consumer protection. As with the PPSA, each province has its own consumer protection code and again, while similar, there are significant differences from province to province. The consumer protection legislation in most provinces sets out certain protections on behalf of lessees and certain disclosure requirements.

Regulatory Background and State of the Industry

Financial institutions are prohibited from leasing cars and trucks under 24 tonnes. Further, financial institutions that are regulated under the Bank Act are prohibited from taking a residual interest in any one lease in excess of 25% of the original equipment cost and 10% in its entire portfolio. It should also be noted that the prohibition is on leasing and not financing. A bank can provide financing for a commercial or consumer user to purchase a car based on a term note with a security interest in the car, but cannot provide a nominal value lease. Accordingly, it is not uncommon to see banks holding a portfolio of motor vehicles in their overall structure.

Due to these restrictions, motor vehicles finance is fragmented. According to a recent Canadian Finance & Leasing Association ('CFLA') study, 36% of the total number of equipment lessors is focused in the car market, with a total of $14.5 billion in new originations annually. Needless to say, this is an area where a smaller leasing company may be able to make its mark if it were able to provide a unique origination strategy. The prohibition on car leasing does not extend to commercial finance companies that are not banks and, as such, certain very large commercial finance companies are involved in this market, including GMAC Commercial Finance LLC and Ford Credit Canada Limited. Further, while banks are not allowed to enter into relationships with consumers for motor vehicle leasing, they are allowed to finance leasing companies. Accordingly, it is not uncommon to see a relatively small Canadian lessor having a warehouse facility and a purchase facility with a schedule 1 or 2 bank.

Vicarious Liability

One area in which Canada and the United States differ greatly is in regard to vicarious liability. Unlike in the United States, it would be rare for a court in Canada to find a lessor vicariously liable for the acts of its lessee unless it can be shown that there is some 'special' connection between the lessor and the vendor of the equipment. Unfortunately, one area that does not have this special protection is that of motor vehicles. In Canada, many of the provinces have enacted motor vehicle and highway traffic legislation under which lessors and conditional sellers may be held vicariously liable.

Generally, awards for personal injury and property damage tend to be relatively small. However, a recent settlement in Ontario caused this to change when a significant award of approximately $13 million was made against the lessor with respect to personal injuries suffered by a passenger in a motor vehicle accident. As these awards are quite rare, the leasing company did not have adequate insurance to protect against this loss. This caused an outcry among equipment lessors in Ontario and ultimately resulted in a cap of $1 million being introduced in the province.

The general landscape in Canada, including Quebec, in regard to vicarious liability is that a lessor will not be held liable for the personal injury suffered by an accident victim in all provinces except Alberta, British Columbia, and Ontario. As noted above, liability in Ontario is limited to $1 million. Vicarious liability in the province of British Columbia is a rather new development in that the court in the recent case of Yeung v. Au (2006) B.C. 975 held that an exemption previously used by motor vehicle lessors can no longer be relied on. Under the British Columbia Motor Vehicle Act, a conditional seller is specifically exempted from liability. Case law prior to the decision in the Yeung case found that a lessor would be treated in the same manner as a conditional seller. The Yeung case, however, reversed this decision and lessors are now liable. Needless to say, this development has been badly received by motor vehicle lessors in British Columbia, and there is now considerable political pressure to amend the Highway Traffic Act and the Motor Vehicle Act in British Columbia to provide equipment lessors with the same protections as conditional sellers. It is not clear when these changes may take effect, or if they will at all. It should also be noted, and frankly quite surprisingly so, that there is no current movement in the province of Alberta to cap or remove vicarious liability.

Vicarious liability for lessors for property damage is much broader in that all provinces have to provide for this, except the eastern provinces, which are Prince Edward Island, Nova Scotia, New Brunswick, and Newfoundland. It is not clear in the province of Saskatchewan whether a lessor would be liable for property damage as there is some complexity within the meaning of 'owner.'

Conditional sellers' liability is the same as that of lessors', except in British Columbia, as noted above, where they are clearly exempt. However, it is not clear with respect to Ontario whether the cap on liability, as discussed above, will cover a conditional seller. In addition, it is also uncertain in Ontario whether general principles under the Motor Vehicle Act will be read broadly enough to cause conditional sellers to be liable. Due to this uncertainty, it may be preferable when transacting business in Ontario to remove the title retention language in a conditional sales agreement so that the transaction would be determined to be a strict financing, as opposed to a conditional sale. Although the removal of the title retention language may cause the conditional seller to lose certain priorities it would otherwise obtain (such as a priority over landlord and certain government claims), it would ensure that there is no vicarious liability. This will be a business decision on a case-by-case basis.

The rule with respect to property damage for conditional sellers is the same as that with respect to leasing, except in the province of British Columbia where it is clear that there is no liability for property damage.

Next month's instalment will discuss registering security and the Motor Vehicle Dealers Act.

Jonathan E. Fleisher is a partner of the Toronto-based firm of Cassels Brock & Blackwell LLP, and writes extensively about leasing issues in Canada. He may be contacted at [email protected] or 416-860-6596.

Part One of a Two-Part Series

In the past, I have written a number of articles directed at U.S. leasing professionals on what they should know about doing business in Canada. These past articles have focused on the leasing business in general as opposed to any particular sector. They discussed broad issues, such as withholding tax and regulatory concerns, but did not examine the specifics of any particular class of collateral or industry sector. During the past several months, I have received a number of inquiries from U.S. lessors in regard to the financing of motor vehicles in Canada. It became readily apparent that not only are there significant differences in law and practice affecting Canadian and U.S. lessors, there also exists a general misunderstanding of the laws of Canada. While generally, Canadian and U.S. law and practice are similar, one area in which they are divergent is motor vehicles. This article, while far from being a complete guide, provides certain guidance as to the most significant concerns.

Background

Canada's legal system, much like that of the United States, is a combination of federal and provincial law. The operation and sale of motor vehicles is a provincial, as opposed to federal matter. Similarly, provincial law governs registering security interests in Canada. Unlike in the United States, a Uniform Commercial Code ('UCC') has not been adopted; instead, each province has enacted its own personal property regime, which regimes fortunately, except for Quebec, are substantially similar. This governing act is called the Personal Property Security Act ('PPSA'). Quebec, which has its own origin under French law, has adopted a civil code (much like Louisiana) and has significantly different procedures and policies than the other nine provinces. For this reason, any reference in this article to Canada will mean the nine provinces other than Quebec, often called 'the rest of Canada' or ROC. Further, since most economic activity takes place in the province of Ontario, the focus of this article is Ontario law. It should also be noted that while the PPSA is similar in the ROC, specific motor vehicle(s) regulations and highway traffic act laws can vary significantly from province to province. As mentioned above, Quebec has a separate and distinct legal structure and, as such, no comment will be provided on its particular issues and concerns except as otherwise stated.

This article addresses three particular areas of interest to motor vehicle lessors. The first section discusses the current law with respect to vicarious liability. This section provides some guidance as to the law across Canada, including Quebec. The second part of the article discusses how to register a security interest in motor vehicles and appropriate titling law. The third part focuses on particular regulatory requirements. This section deals strictly with Ontario.

Lastly, it should be noted that this article deals strictly with commercial, as opposed to consumer, finance. Needless to say, there are significant rules in Canada with respect to consumer finance and consumer protection. As with the PPSA, each province has its own consumer protection code and again, while similar, there are significant differences from province to province. The consumer protection legislation in most provinces sets out certain protections on behalf of lessees and certain disclosure requirements.

Regulatory Background and State of the Industry

Financial institutions are prohibited from leasing cars and trucks under 24 tonnes. Further, financial institutions that are regulated under the Bank Act are prohibited from taking a residual interest in any one lease in excess of 25% of the original equipment cost and 10% in its entire portfolio. It should also be noted that the prohibition is on leasing and not financing. A bank can provide financing for a commercial or consumer user to purchase a car based on a term note with a security interest in the car, but cannot provide a nominal value lease. Accordingly, it is not uncommon to see banks holding a portfolio of motor vehicles in their overall structure.

Due to these restrictions, motor vehicles finance is fragmented. According to a recent Canadian Finance & Leasing Association ('CFLA') study, 36% of the total number of equipment lessors is focused in the car market, with a total of $14.5 billion in new originations annually. Needless to say, this is an area where a smaller leasing company may be able to make its mark if it were able to provide a unique origination strategy. The prohibition on car leasing does not extend to commercial finance companies that are not banks and, as such, certain very large commercial finance companies are involved in this market, including GMAC Commercial Finance LLC and Ford Credit Canada Limited. Further, while banks are not allowed to enter into relationships with consumers for motor vehicle leasing, they are allowed to finance leasing companies. Accordingly, it is not uncommon to see a relatively small Canadian lessor having a warehouse facility and a purchase facility with a schedule 1 or 2 bank.

Vicarious Liability

One area in which Canada and the United States differ greatly is in regard to vicarious liability. Unlike in the United States, it would be rare for a court in Canada to find a lessor vicariously liable for the acts of its lessee unless it can be shown that there is some 'special' connection between the lessor and the vendor of the equipment. Unfortunately, one area that does not have this special protection is that of motor vehicles. In Canada, many of the provinces have enacted motor vehicle and highway traffic legislation under which lessors and conditional sellers may be held vicariously liable.

Generally, awards for personal injury and property damage tend to be relatively small. However, a recent settlement in Ontario caused this to change when a significant award of approximately $13 million was made against the lessor with respect to personal injuries suffered by a passenger in a motor vehicle accident. As these awards are quite rare, the leasing company did not have adequate insurance to protect against this loss. This caused an outcry among equipment lessors in Ontario and ultimately resulted in a cap of $1 million being introduced in the province.

The general landscape in Canada, including Quebec, in regard to vicarious liability is that a lessor will not be held liable for the personal injury suffered by an accident victim in all provinces except Alberta, British Columbia, and Ontario. As noted above, liability in Ontario is limited to $1 million. Vicarious liability in the province of British Columbia is a rather new development in that the court in the recent case of Yeung v. Au (2006) B.C. 975 held that an exemption previously used by motor vehicle lessors can no longer be relied on. Under the British Columbia Motor Vehicle Act, a conditional seller is specifically exempted from liability. Case law prior to the decision in the Yeung case found that a lessor would be treated in the same manner as a conditional seller. The Yeung case, however, reversed this decision and lessors are now liable. Needless to say, this development has been badly received by motor vehicle lessors in British Columbia, and there is now considerable political pressure to amend the Highway Traffic Act and the Motor Vehicle Act in British Columbia to provide equipment lessors with the same protections as conditional sellers. It is not clear when these changes may take effect, or if they will at all. It should also be noted, and frankly quite surprisingly so, that there is no current movement in the province of Alberta to cap or remove vicarious liability.

Vicarious liability for lessors for property damage is much broader in that all provinces have to provide for this, except the eastern provinces, which are Prince Edward Island, Nova Scotia, New Brunswick, and Newfoundland. It is not clear in the province of Saskatchewan whether a lessor would be liable for property damage as there is some complexity within the meaning of 'owner.'

Conditional sellers' liability is the same as that of lessors', except in British Columbia, as noted above, where they are clearly exempt. However, it is not clear with respect to Ontario whether the cap on liability, as discussed above, will cover a conditional seller. In addition, it is also uncertain in Ontario whether general principles under the Motor Vehicle Act will be read broadly enough to cause conditional sellers to be liable. Due to this uncertainty, it may be preferable when transacting business in Ontario to remove the title retention language in a conditional sales agreement so that the transaction would be determined to be a strict financing, as opposed to a conditional sale. Although the removal of the title retention language may cause the conditional seller to lose certain priorities it would otherwise obtain (such as a priority over landlord and certain government claims), it would ensure that there is no vicarious liability. This will be a business decision on a case-by-case basis.

The rule with respect to property damage for conditional sellers is the same as that with respect to leasing, except in the province of British Columbia where it is clear that there is no liability for property damage.

Next month's instalment will discuss registering security and the Motor Vehicle Dealers Act.

Jonathan E. Fleisher is a partner of the Toronto-based firm of Cassels Brock & Blackwell LLP, and writes extensively about leasing issues in Canada. He may be contacted at [email protected] or 416-860-6596.