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

Unlike in the United States, the appropriate mechanism for registering a security interest in a motor vehicle is to register the interest under the applicable PPSA. In all provinces but Ontario, any lease in excess of one year must be registered. In Ontario, any lease that is 'intended as security' needs to be registered. The meaning of the phrase 'lease intended as security' is highly litigated and creates a significant amount of uncertainty. Accordingly, the practical approach is that all leases except for short-term rental agreements should be registered in Ontario. Although it is beyond the scope of this article to discuss in detail the appropriate procedures for registering under the PPSA, there are certain rules regarding motor vehicles that will be focused on.

The definition of 'motor vehicle' for the purposes of the PPSA is:

(a) an automobile, motorcycle, motorized snow vehicle and any other vehicle that is self propelled, it does not include, a streetcar; (b) other vehicle running only upon rails; (c) a farm tractor; (d) an implement of husbandry; (e) a machine acquired for use or used as a road building machine; or (f) a craft intended primarily for use in the air or in or upon the water.

It should be noted that a lift truck is considered to be a motor vehicle, while a trailer is not.

In order to properly register financing statements to protect a security interest in a motor vehicle, the Vehicle Identification Number ('VIN') should be set out in the financing statement. While this is not strictly required for commercial motor vehicles, the failure to set out the VIN in the financing statement would result in the purchaser of a motor vehicle from a debtor being able to buy the motor vehicle free and clear of any secured party's claim. In other words, a secured party who did not set out the VIN in its financing statement would have priority over a trustee in bankruptcy and other registered secured parties, but would not have priority over a purchaser of the motor vehicle for value. Accordingly, the practical result is that in all cases the VIN should be set out in the financing statement. As noted above, if trailers are being financed, there is no VIN and no requirement as such. Where the motor vehicle financing is for a consumer purpose, the VIN must be set out in all cases.

Under Ontario law, when a party is purchasing a motor vehicle, that party must search against the VIN of the vehicle. There is no requirement to search against the secured party, only the VIN. If the VIN is not set out, then there will be no notice of the security interest and as a result, the party will take the vehicle free and clear. As with all property, there is no requirement to search if a sale is in the ordinary course of the vendor's business.

One of the quirks of the Ontario PPSA is that there is no requirement to provide a general collateral description on the financing statement. The setting out of the VIN in the financing statement does not limit the security interest that a lessor may have in the properties and assets of a particular debtor. Where a VIN is indicated on the financing statement but no collateral description is set out in the general collateral box, the registration will not provide adequate protection to third parties who are otherwise financing the debtor. The other PPSA provinces have similar rules with respect to the registration of the VIN but there is a specific requirement in each of these provinces to provide a general collateral description.

Accordingly, the most significant distinction between the United States and Canada is that there is no requirement to have the motor vehicle titled or noted on the registration in the name of the lessor or conditional seller in Canada. While the noting on title may provide additional protection to the lessor or conditional seller under the concept of actual notice, it should be understood that this is not a legal requirement, even though it is common practice. More importantly, the noting on title is not a substitute to registering under the applicable PPSA. If a party is merely noted on title and a registration is not affected under the PPSA, then the security interest as created under the lease is ineffective. Accordingly, when leasing or conditionally selling motor vehicles in Canada, it is not permissible to rely on U.S. procedures and practices in order to protect a security interest. This point is emphasized, as it is the most common mistake made by foreign lessors when they initiate operations in Canada.

In order to be noted on title, a lessor must be a motor vehicle dealer.

Motor Vehicle Dealers Act

Motor vehicle dealers in Ontario are governed by the Motor Vehicle Dealers Act ('MVDA'). Except for certain exemptions as will be discussed below, no person can sell a motor vehicle unless he or she is a registered dealer. There is no direct statutory prohibition on leasing motor vehicles by non-registered dealers, but an unregistered residual lessor is prohibited from selling the vehicle at the end of the term.

The MVDA is somewhat unclear as to which parties are caught by the sales prohibition and the circumstances under which they can and cannot sell motor vehicles. The easy case is that no new or used car sales can be made to the public unless the party selling is a registered dealer. Clearly, this is a form of consumer protection. The rules to become a dealer are discussed below. Private sales are specifically exempted under the MVDA, pursuant to the regulations. Where the situation becomes murkier is in regard to a secured creditor. Under the regulations to the MVDA, there is an exemption for:

(a) an assignee, custodian, liquidator, receiver, trustee, or other person acting under the Bankruptcy Act (Canada), the Business Corporations Act, the Courts of Justice Act, or the Winding-up Act (Canada) or a person acting under the order of any court or an executor or trustee who sells a motor vehicle in the course of the person's duties; or

(b) a leasing company that is a subsidiary or an associate of
a registered motor vehicle dealer, if the leasing company has filed with the Registrar a declaration that all lease-expired vehicles will be sold through the registered motor vehicle dealership and not offered to the public by the leasing company.

What is unclear is the exact meaning of 'receiver' in the first case and 'associate' in the second.

When the MVDA was enacted, 'receiver' was not a defined term under the Bankruptcy Act (Canada). It is now defined, and the definition includes a secured creditor acting on his or her own accord. The problem is that the definition may not be broad enough to cover a secured creditor who only has an interest in a single vehicle of an otherwise large entity.

There is very limited case law to provide guidance on this point. In In Re:731771 Ontario Ltd. et al v. The Queen in the Right of Ontario, the Ontario Court of Appeal considered whether banks and lending institutions selling vehicles to the public were motor vehicle dealers within the meaning of the MVDA. The court, for other reasons, did not rule on this matter, but there was a rather well-reasoned dissent (which is obiter) by Rosalie Silberman Abella J.A. that focuses on the definition of a motor vehicle dealer. Under '1(i) of the MVDA, a motor vehicle dealer is defined as a person who carries on 'the business' of buying and selling motor vehicles. A bank is clearly in the business of banking and not 'in the business of buying and selling vehicles' but only realizes on its security from time to time (and from a bank's perspective, it is hoped, not that often). A bank is in the business of lending. Further, it is clear that the intent of '14(c) of the regulations (as set out above) contemplates bankers. Justice Abella J.A., in discussing whether banks realizing on security should be covered by the regulation comments:

These are the classes of people banks and financial institutions customarily rely on to assist them in realizing on their securities. There is no principled or logical justification for distinguishing banks and lending institutions from these classes of persons who are undertaking analogous transactions in an analogous capacity. It is illogical to declare that banks and lending institutions are carrying on business as 'motor vehicle dealers,' but that the 'agents' they routinely use to dispose of their vehicles are not.

Since the case was overturned on other grounds, these rather helpful statements are not precedent, but it is argued that they would be extremely persuasive if the issue were to arise.

This, however, does not assist a leasing company that is selling a vehicle at the end of the term of a lease. In these circumstances, the leasing company is not realizing on its security but is selling to the public. In this situation, a leasing company would have to rely on another exemption. If the leasing company can show it is 'associated' with a dealer, then it may be able to rely on that exemption. The word 'associated' is not defined in the Act and could have a variety of meanings. The most common is one of an ownership interest, and, in fact, many leasing companies in Canada have cross-ownership with dealers. There are other meanings to the word including 'having a relationship with.' In these cases, if it can be shown that the dealer and leasing company are acting in concert, then the exemption may be relied upon. From a policy perspective, which is to protect the public, it would seem that there would be little harm if a leasing company sold its residual interest through a registered dealer that it has a relationship with. That said, this is an argument and not a clear statement of the law. The better policy advice is to have the leasing company either be a dealer or have cross-ownership with a dealer.

Returning to the registration issue, in order to be noted on title, a financier must become a motor vehicle dealer and obtain a registration identification number ('RIN').

In order to become a dealer, the particular company must make the applicable filing with the Ministry of Consumer & Commercial Relations ' Company Branch, provide a valid vendor permit under the Retail Sales Tax Act, and be registered to collect goods and services tax ('GST') with the Canadian Revenue Agency.

Additionally, the most problematic concern is that an employee of the company must be pre-screened by the Ontario Motor Vehicle Industry Counsel ('OMVIC'), a body created and self-regulated by motor vehicle dealers. The screening process is designed both to ensure good character and to have properly trained sales people. In order to obtain this designation, the employee must take a course put on by OMVIC, which takes about 12 weeks. A leasing company cannot be a dealer overnight.

It should also be noted that there is a proposed New Motor Vehicle Dealers Act, 2002 (the 'Act'). This Act, while passed, has not yet come into effect. Under the new Act, a trade will include 'buying, selling, leasing ' a motor vehicle.' In June 2004, the Ministry of Consumer and Business Services released a draft of proposed regulations under the new Act to have eight classes of motor vehicle dealers. One of these classes will be a lessor. It is not clear under this Act whether a secured party who has a security interest over motor vehicles will be able to realize on its security. Further, the Ministry is still receiving comments from industry groups, which comments may result in significant amendments to the Act and regulations. Currently, the government has not indicated any timetable when the regulation will be finalized or when the Act will come into force. Accordingly, the Act will not be summarized at this time.

In sum, the best advice for a leasing company is to become a registered dealer. If the leasing company is merely financing non-residual transactions, then it would be recommended that a note and security agreement structure be utilized. This would exempt the finance company from vicarious liability, allow for proper registration of a security interest under the PPSA, and, finally, eliminate the requirement to become a registered dealer if it is required to dispose of its vehicles.

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 Two of a Two-Part Series

Last month's installment discussed current Canadian law with respect to vicarious liability. Part Two of this series addresses how to register a security interest in motor vehicles, appropriate titling law, and the Motor Vehicle Dealers Act.

Registering Security

Unlike in the United States, the appropriate mechanism for registering a security interest in a motor vehicle is to register the interest under the applicable PPSA. In all provinces but Ontario, any lease in excess of one year must be registered. In Ontario, any lease that is 'intended as security' needs to be registered. The meaning of the phrase 'lease intended as security' is highly litigated and creates a significant amount of uncertainty. Accordingly, the practical approach is that all leases except for short-term rental agreements should be registered in Ontario. Although it is beyond the scope of this article to discuss in detail the appropriate procedures for registering under the PPSA, there are certain rules regarding motor vehicles that will be focused on.

The definition of 'motor vehicle' for the purposes of the PPSA is:

(a) an automobile, motorcycle, motorized snow vehicle and any other vehicle that is self propelled, it does not include, a streetcar; (b) other vehicle running only upon rails; (c) a farm tractor; (d) an implement of husbandry; (e) a machine acquired for use or used as a road building machine; or (f) a craft intended primarily for use in the air or in or upon the water.

It should be noted that a lift truck is considered to be a motor vehicle, while a trailer is not.

In order to properly register financing statements to protect a security interest in a motor vehicle, the Vehicle Identification Number ('VIN') should be set out in the financing statement. While this is not strictly required for commercial motor vehicles, the failure to set out the VIN in the financing statement would result in the purchaser of a motor vehicle from a debtor being able to buy the motor vehicle free and clear of any secured party's claim. In other words, a secured party who did not set out the VIN in its financing statement would have priority over a trustee in bankruptcy and other registered secured parties, but would not have priority over a purchaser of the motor vehicle for value. Accordingly, the practical result is that in all cases the VIN should be set out in the financing statement. As noted above, if trailers are being financed, there is no VIN and no requirement as such. Where the motor vehicle financing is for a consumer purpose, the VIN must be set out in all cases.

Under Ontario law, when a party is purchasing a motor vehicle, that party must search against the VIN of the vehicle. There is no requirement to search against the secured party, only the VIN. If the VIN is not set out, then there will be no notice of the security interest and as a result, the party will take the vehicle free and clear. As with all property, there is no requirement to search if a sale is in the ordinary course of the vendor's business.

One of the quirks of the Ontario PPSA is that there is no requirement to provide a general collateral description on the financing statement. The setting out of the VIN in the financing statement does not limit the security interest that a lessor may have in the properties and assets of a particular debtor. Where a VIN is indicated on the financing statement but no collateral description is set out in the general collateral box, the registration will not provide adequate protection to third parties who are otherwise financing the debtor. The other PPSA provinces have similar rules with respect to the registration of the VIN but there is a specific requirement in each of these provinces to provide a general collateral description.

Accordingly, the most significant distinction between the United States and Canada is that there is no requirement to have the motor vehicle titled or noted on the registration in the name of the lessor or conditional seller in Canada. While the noting on title may provide additional protection to the lessor or conditional seller under the concept of actual notice, it should be understood that this is not a legal requirement, even though it is common practice. More importantly, the noting on title is not a substitute to registering under the applicable PPSA. If a party is merely noted on title and a registration is not affected under the PPSA, then the security interest as created under the lease is ineffective. Accordingly, when leasing or conditionally selling motor vehicles in Canada, it is not permissible to rely on U.S. procedures and practices in order to protect a security interest. This point is emphasized, as it is the most common mistake made by foreign lessors when they initiate operations in Canada.

In order to be noted on title, a lessor must be a motor vehicle dealer.

Motor Vehicle Dealers Act

Motor vehicle dealers in Ontario are governed by the Motor Vehicle Dealers Act ('MVDA'). Except for certain exemptions as will be discussed below, no person can sell a motor vehicle unless he or she is a registered dealer. There is no direct statutory prohibition on leasing motor vehicles by non-registered dealers, but an unregistered residual lessor is prohibited from selling the vehicle at the end of the term.

The MVDA is somewhat unclear as to which parties are caught by the sales prohibition and the circumstances under which they can and cannot sell motor vehicles. The easy case is that no new or used car sales can be made to the public unless the party selling is a registered dealer. Clearly, this is a form of consumer protection. The rules to become a dealer are discussed below. Private sales are specifically exempted under the MVDA, pursuant to the regulations. Where the situation becomes murkier is in regard to a secured creditor. Under the regulations to the MVDA, there is an exemption for:

(a) an assignee, custodian, liquidator, receiver, trustee, or other person acting under the Bankruptcy Act (Canada), the Business Corporations Act, the Courts of Justice Act, or the Winding-up Act (Canada) or a person acting under the order of any court or an executor or trustee who sells a motor vehicle in the course of the person's duties; or

(b) a leasing company that is a subsidiary or an associate of
a registered motor vehicle dealer, if the leasing company has filed with the Registrar a declaration that all lease-expired vehicles will be sold through the registered motor vehicle dealership and not offered to the public by the leasing company.

What is unclear is the exact meaning of 'receiver' in the first case and 'associate' in the second.

When the MVDA was enacted, 'receiver' was not a defined term under the Bankruptcy Act (Canada). It is now defined, and the definition includes a secured creditor acting on his or her own accord. The problem is that the definition may not be broad enough to cover a secured creditor who only has an interest in a single vehicle of an otherwise large entity.

There is very limited case law to provide guidance on this point. In In Re:731771 Ontario Ltd. et al v. The Queen in the Right of Ontario, the Ontario Court of Appeal considered whether banks and lending institutions selling vehicles to the public were motor vehicle dealers within the meaning of the MVDA. The court, for other reasons, did not rule on this matter, but there was a rather well-reasoned dissent (which is obiter) by Rosalie Silberman Abella J.A. that focuses on the definition of a motor vehicle dealer. Under '1(i) of the MVDA, a motor vehicle dealer is defined as a person who carries on 'the business' of buying and selling motor vehicles. A bank is clearly in the business of banking and not 'in the business of buying and selling vehicles' but only realizes on its security from time to time (and from a bank's perspective, it is hoped, not that often). A bank is in the business of lending. Further, it is clear that the intent of '14(c) of the regulations (as set out above) contemplates bankers. Justice Abella J.A., in discussing whether banks realizing on security should be covered by the regulation comments:

These are the classes of people banks and financial institutions customarily rely on to assist them in realizing on their securities. There is no principled or logical justification for distinguishing banks and lending institutions from these classes of persons who are undertaking analogous transactions in an analogous capacity. It is illogical to declare that banks and lending institutions are carrying on business as 'motor vehicle dealers,' but that the 'agents' they routinely use to dispose of their vehicles are not.

Since the case was overturned on other grounds, these rather helpful statements are not precedent, but it is argued that they would be extremely persuasive if the issue were to arise.

This, however, does not assist a leasing company that is selling a vehicle at the end of the term of a lease. In these circumstances, the leasing company is not realizing on its security but is selling to the public. In this situation, a leasing company would have to rely on another exemption. If the leasing company can show it is 'associated' with a dealer, then it may be able to rely on that exemption. The word 'associated' is not defined in the Act and could have a variety of meanings. The most common is one of an ownership interest, and, in fact, many leasing companies in Canada have cross-ownership with dealers. There are other meanings to the word including 'having a relationship with.' In these cases, if it can be shown that the dealer and leasing company are acting in concert, then the exemption may be relied upon. From a policy perspective, which is to protect the public, it would seem that there would be little harm if a leasing company sold its residual interest through a registered dealer that it has a relationship with. That said, this is an argument and not a clear statement of the law. The better policy advice is to have the leasing company either be a dealer or have cross-ownership with a dealer.

Returning to the registration issue, in order to be noted on title, a financier must become a motor vehicle dealer and obtain a registration identification number ('RIN').

In order to become a dealer, the particular company must make the applicable filing with the Ministry of Consumer & Commercial Relations ' Company Branch, provide a valid vendor permit under the Retail Sales Tax Act, and be registered to collect goods and services tax ('GST') with the Canadian Revenue Agency.

Additionally, the most problematic concern is that an employee of the company must be pre-screened by the Ontario Motor Vehicle Industry Counsel ('OMVIC'), a body created and self-regulated by motor vehicle dealers. The screening process is designed both to ensure good character and to have properly trained sales people. In order to obtain this designation, the employee must take a course put on by OMVIC, which takes about 12 weeks. A leasing company cannot be a dealer overnight.

It should also be noted that there is a proposed New Motor Vehicle Dealers Act, 2002 (the 'Act'). This Act, while passed, has not yet come into effect. Under the new Act, a trade will include 'buying, selling, leasing ' a motor vehicle.' In June 2004, the Ministry of Consumer and Business Services released a draft of proposed regulations under the new Act to have eight classes of motor vehicle dealers. One of these classes will be a lessor. It is not clear under this Act whether a secured party who has a security interest over motor vehicles will be able to realize on its security. Further, the Ministry is still receiving comments from industry groups, which comments may result in significant amendments to the Act and regulations. Currently, the government has not indicated any timetable when the regulation will be finalized or when the Act will come into force. Accordingly, the Act will not be summarized at this time.

In sum, the best advice for a leasing company is to become a registered dealer. If the leasing company is merely financing non-residual transactions, then it would be recommended that a note and security agreement structure be utilized. This would exempt the finance company from vicarious liability, allow for proper registration of a security interest under the PPSA, and, finally, eliminate the requirement to become a registered dealer if it is required to dispose of its vehicles.

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.