Commercial Lessors and Ontario's New Motor Vehicle Sales and Dealership Act

On Jan. 1, 2010, the long-awaited Ontario Motor Vehicle Dealers Act, 2002 (the “MVDA” or the “Act”) and its two Regulations will come into force. The Act was to come into effect on April 1, 2009, but for a variety of reasons, as will become clear, the Ministry delayed implementation. The impact of this legislation is far-reaching to any person who sells, leases, or finances motor vehicles (consumer or commercial) in the Province of Ontario. The legislation is both a quasi-consumer protection act and a regulatory document combined into one. It is complex. A complete summary is beyond the scope of this article. This article focuses on some of the broad concepts that are applicable to all persons dealing in motor vehicles, with a particular emphasis on commercial finance. As will become clear, the Act, while having some helpful consumer protection provisions, may have a strong negative impact on dealers and the finance market generally.

Background and Overview

The most fundamental change under the MVDA is to eliminate a single class of dealers and to replace the single class with seven different classes of registrants. Each class has its own set of obligations and exemptions under the Act, with the most complex and most highly regulated being the general dealer.

The MVDA applies to anyone who wishes to “trade” under the Act, namely, to buy, sell, lease, advertise, or exchange an interest in a motor vehicle, and will be administered by the Ontario Motor Vehicle Industry Council (“OMVIC”). The most noteworthy implications of the MVDA are contained in the two Regulations associated with the Act. There are a series of groups that are exempted from the Act. Most notably, secured creditors, auction houses (that are regulated but otherwise exempt), and insolvency professionals. The major changes are:

1) Introduction of a Code of Ethics.

2) New Rules on Advertising.

3) Right to Rescind Transaction If Certain Fundamental Misrepresentations Are Made.

Under the Act, consumers other than commercial lessees will be afforded the right to rescind a contract for purchase or lease within 90 days, if a dealer fails to comply with a number of critical disclosure requirements.

4) Dealer Classification.

The Regulations set out seven defined classes and sub-classes of motor vehicle dealers. All motor vehicle dealers in Ontario will be required to register and become licensed under one (or more) of these defined classes. The seven classes are as follows: (i) general dealers (divided into two sub-classes: new and used; and used dealers); (ii) brokers; (iii) wholesalers; (iv) exporters; (v) outside Ontario dealers; (vi) lease finance dealers; and (vii) fleet lessors (divided into two sub-classes: commercial lessors and short-term lessors).

5) Required Changes to Sale and Lease Documents.

The MVDA Regulations will drastically alter contracts for the sale or lease of motor vehicles by creating specific contractual requirements for each class of dealer. Accordingly, all bills of sales and lease documents will have to be amended.

In addition to the mandated changes under the MVDA there are a number of more subtle changes that while not mandated should be reflected in the document, including a requirement that the lessee provides the lessor with a disclosure statement at the lessor's request, a requirement to provide a listing of any major repairs, and that all costs associated with any audit of the end of lease will be borne by the lessee.

6) Disclosure Statement.

All sales and leases (except commercial) will require disclosure statements where applicable, or general declarations designed to inform consumers of their rights under the Act. This statement will be appended to all sales documents. This disclosure statement sets out 25 factual points about the vehicle that must be disclosed to the consumer. The issue, of course, is how does the dealer obtain this information. When the motor vehicle is a new car, it is relatively easy; but for used cars, the best information comes from the former owner and, as such, the dealer must have a method of obtaining this information.

Fleet Lessor Obligations and Exemptions

The remainder of this discussion focuses primarily on the impact the MVDA has on fleet lessors.

Regulatory Matters

Registering under one of the two fleet lessor sub-classes allows the motor vehicle dealer to take advantage of certain exemptions under the MVDA. From a regulatory standpoint: 1) the fleet lessor is exempt from hiring regulated salespeople. This is a significant change from the old act and makes it far easier for commercial finance companies to transact business, 2) fleet lessors are not required to disclose to the registrar the identity of shareholders or a change of an officer or director of the entity, 3) fleet lessors are not to be subject to the appointment of a receiver and manager, or a freeze order, 4) fleet lessors are exempt from a requirement under the Act that mandates the filing of financial statements with the registrar upon request.

These changes reduce the burden on commercial finance companies and should increase the number of companies providing financing to the market. Many U.S. lessors have resisted entering the Ontario market due to the requirement of having a registered salesperson.

Disclosure Requirement and Sale Issues

The most significant of the exemptions provided to fleet lessors under the Act is the exemption to comply with the vast disclosure requirements for lease documents. It is equally significant that the fleet lessor is exempt from the rescission provisions under the Act when selling or leasing a motor vehicle to a lessee who is not another registered motor vehicle dealer.

The implication is that a fleet lessor can transact business much as it had in the past and no longer needs a registered salesperson. The only tricky part, as discussed in the next section, is that if the fleet lessor has a residual lease and it takes back the vehicle at the end of the term, it needs to have a method to sell the vehicle.

The Commercial Lessor and the Sale of a Motor Vehicle

It is important to note that unlike the old Ontario Motor Vehicle Dealers Act, the MVDA does provide some assistance to a leasing company that is selling a vehicle at the end of the term of a lease. Practically speaking, what this means is that under circumstances where the leasing company is not realizing on its security or the commercial lessor does not wish to re-lease or re-sell the vehicle once the original lease has terminated, the motor vehicle may be sold by the commercial
lessee at the end of the term without any special disclosure. The Act has broadened the category of to whom the vehicle can be sold to include an individual who drove the vehicle during the term of the lease; officers, directors, or a partner of the lessee; or to a person who arranges for and conducts an auction of motor vehicles as prescribed by the Act, while still remaining within the contract disclosure exemption.

The circumstances change when a commercial lessor wishes to sell a motor vehicle at the end of the term of a lease to another registrant under the Act. Here, the commercial lessor must comply with the 25 mandated disclosure requirements. In order to obtain such information, commercial lessors will need to survey their lessees prior to the return of the leased vehicle in order to accurately reveal the required contractual information to the purchasing registrant.

If the dealer is not able to obtain the disclosure statement, which would typically occur if there is an insolvency, then the fleet lessor could only sell at auction.

Securitization and Ongoing Sale Problems

If a fleet lessor simply leases to its lessee and ultimately sells the vehicle to the lessee, then the new Act is more helpful than prior legislation. However, this is simply not commercial reality in the modern finance market. Most lessors need to obtain some manner of financing to expand their businesses. The most typical method, prior to the recent credit crunch, was the securitization market whereby the fleet lessor would sell its lease and often the vehicle to a special purpose entity (“SPE”) that would then issue notes into the market. The problem with the MVDA is that the transfer to the SPE would be seen as a “trade” and require disclosure. Accordingly, the fleet lessor would during the term of the lease be required to ask the lessee to provide a disclosure document that a lessee would likely be slow to comply with and perhaps be reticent to fill out, as it may not want to disclose problems. This concern also exists if companies sell portfolios to each other from time to time.

Options Outside the Scope of the Act

Needless to say, the new rules governing the motor vehicle dealer industry are significant and quite cumbersome. An alternative for a commercial finance company may be to provide equipment financing by way of a loan and security agreement as opposed to becoming a licensed motor vehicle dealer under the MVDA. A loan and security agreement provided by a financial institution to a borrower for the purposes of financing the purchase of a motor vehicle does not fall within the definition of a “trade” under the MVDA, and, as such, the financial institution's compliance with the Act is not required. One issue with this alternative option arises when the borrower-lessee acts on its rescission right under the Act. How then will the financial institution ensure its security under the loan?

As a potential remedy to this issue, the lending financial institution can build a provision into its loan and security agreement prohibiting the borrower from exercising its rescission right under the MVDA to ensure its security over the loan. While this appears to be a fairly simple remedy, it is uncertain whether a court would uphold such a provision. As the Act has yet to come into force, there is no case law to examine whether such a clause would be enforceable by a registered fleet lessor. It appears from the Act that a provision of the sort would be enforceable by the lending financial institution, as the MVDA specifically provides for an exemption to creditors who are not registered under the Act. This exemption however, does not extend to the registered motor vehicle dealer leasing the vehicle to the borrower-lessee. As well, it is unclear from the Act whether a registered motor vehicle dealer under the MVDA is able to contract out of the rescission rights prescribed under the Regulations to the Act.

The lending financial institution may also wish to consider entering into agreements directly with the registered motor vehicle dealer whereby the commercial finance company will hold funds in escrow for the dealer until the 90-day rescission period is over in order to secure the institution's loan to the borrower-lessee. Agreements of this nature will enhance the need for financial institutions to have vendor programs with motor vehicle dealers.

Conclusion

The MVDA's stated commercial intention of protecting consumers may have some rather inadvertent consequences. Loans may no longer be available, as the right to rescind may be too much of a risk for a commercial finance company to undertake. From the commercial lessors' standpoint, the regime should be helpful. They no longer need a registered salesperson, which should provide for some welcome relief to finance professionals who do not see themselves as car salespersons. On the other hand, more care needs to be taken in the actual lease document and the ability to sell the vehicle at the end of the term of a residual lease. Further, the lack of safe harbor rules and the likely chilling effect on the securitization market may have material adverse effects that more than offset the gains made under the Act. The delay of implementation is welcomed relief for car dealers and finance companies to come to terms with the many changes. It also may give the Ministry an opportunity to fix certain problems inherent in the Act.

Jonathan Fleisher is a partner in the Financial Services and Business Law Groups of the Toronto-based firm of Cassels Brock & Blackwell LLP. He has particular expertise assisting U.S. commercial finance companies, both public and private, with establishing operations in Canada, providing both legal and practical business advice. He is the only Canadian lawyer to sit on a sub-committee of the Equipment Leasing and Finance Association. His expertise also extends to all forms of debt finance, including sub-debt, venture financings, convertible debt, and asset-based lending and in enforcing creditors' rights and workouts. He may be reached at [email protected] or 416-860-6596.

On Jan. 1, 2010, the long-awaited Ontario Motor Vehicle Dealers Act, 2002 (the “MVDA” or the “Act”) and its two Regulations will come into force. The Act was to come into effect on April 1, 2009, but for a variety of reasons, as will become clear, the Ministry delayed implementation. The impact of this legislation is far-reaching to any person who sells, leases, or finances motor vehicles (consumer or commercial) in the Province of Ontario. The legislation is both a quasi-consumer protection act and a regulatory document combined into one. It is complex. A complete summary is beyond the scope of this article. This article focuses on some of the broad concepts that are applicable to all persons dealing in motor vehicles, with a particular emphasis on commercial finance. As will become clear, the Act, while having some helpful consumer protection provisions, may have a strong negative impact on dealers and the finance market generally.

Background and Overview

The most fundamental change under the MVDA is to eliminate a single class of dealers and to replace the single class with seven different classes of registrants. Each class has its own set of obligations and exemptions under the Act, with the most complex and most highly regulated being the general dealer.

The MVDA applies to anyone who wishes to “trade” under the Act, namely, to buy, sell, lease, advertise, or exchange an interest in a motor vehicle, and will be administered by the Ontario Motor Vehicle Industry Council (“OMVIC”). The most noteworthy implications of the MVDA are contained in the two Regulations associated with the Act. There are a series of groups that are exempted from the Act. Most notably, secured creditors, auction houses (that are regulated but otherwise exempt), and insolvency professionals. The major changes are:

1) Introduction of a Code of Ethics.

2) New Rules on Advertising.

3) Right to Rescind Transaction If Certain Fundamental Misrepresentations Are Made.

Under the Act, consumers other than commercial lessees will be afforded the right to rescind a contract for purchase or lease within 90 days, if a dealer fails to comply with a number of critical disclosure requirements.

4) Dealer Classification.

The Regulations set out seven defined classes and sub-classes of motor vehicle dealers. All motor vehicle dealers in Ontario will be required to register and become licensed under one (or more) of these defined classes. The seven classes are as follows: (i) general dealers (divided into two sub-classes: new and used; and used dealers); (ii) brokers; (iii) wholesalers; (iv) exporters; (v) outside Ontario dealers; (vi) lease finance dealers; and (vii) fleet lessors (divided into two sub-classes: commercial lessors and short-term lessors).

5) Required Changes to Sale and Lease Documents.

The MVDA Regulations will drastically alter contracts for the sale or lease of motor vehicles by creating specific contractual requirements for each class of dealer. Accordingly, all bills of sales and lease documents will have to be amended.

In addition to the mandated changes under the MVDA there are a number of more subtle changes that while not mandated should be reflected in the document, including a requirement that the lessee provides the lessor with a disclosure statement at the lessor's request, a requirement to provide a listing of any major repairs, and that all costs associated with any audit of the end of lease will be borne by the lessee.

6) Disclosure Statement.

All sales and leases (except commercial) will require disclosure statements where applicable, or general declarations designed to inform consumers of their rights under the Act. This statement will be appended to all sales documents. This disclosure statement sets out 25 factual points about the vehicle that must be disclosed to the consumer. The issue, of course, is how does the dealer obtain this information. When the motor vehicle is a new car, it is relatively easy; but for used cars, the best information comes from the former owner and, as such, the dealer must have a method of obtaining this information.

Fleet Lessor Obligations and Exemptions

The remainder of this discussion focuses primarily on the impact the MVDA has on fleet lessors.

Regulatory Matters

Registering under one of the two fleet lessor sub-classes allows the motor vehicle dealer to take advantage of certain exemptions under the MVDA. From a regulatory standpoint: 1) the fleet lessor is exempt from hiring regulated salespeople. This is a significant change from the old act and makes it far easier for commercial finance companies to transact business, 2) fleet lessors are not required to disclose to the registrar the identity of shareholders or a change of an officer or director of the entity, 3) fleet lessors are not to be subject to the appointment of a receiver and manager, or a freeze order, 4) fleet lessors are exempt from a requirement under the Act that mandates the filing of financial statements with the registrar upon request.

These changes reduce the burden on commercial finance companies and should increase the number of companies providing financing to the market. Many U.S. lessors have resisted entering the Ontario market due to the requirement of having a registered salesperson.

Disclosure Requirement and Sale Issues

The most significant of the exemptions provided to fleet lessors under the Act is the exemption to comply with the vast disclosure requirements for lease documents. It is equally significant that the fleet lessor is exempt from the rescission provisions under the Act when selling or leasing a motor vehicle to a lessee who is not another registered motor vehicle dealer.

The implication is that a fleet lessor can transact business much as it had in the past and no longer needs a registered salesperson. The only tricky part, as discussed in the next section, is that if the fleet lessor has a residual lease and it takes back the vehicle at the end of the term, it needs to have a method to sell the vehicle.

The Commercial Lessor and the Sale of a Motor Vehicle

It is important to note that unlike the old Ontario Motor Vehicle Dealers Act, the MVDA does provide some assistance to a leasing company that is selling a vehicle at the end of the term of a lease. Practically speaking, what this means is that under circumstances where the leasing company is not realizing on its security or the commercial lessor does not wish to re-lease or re-sell the vehicle once the original lease has terminated, the motor vehicle may be sold by the commercial
lessee at the end of the term without any special disclosure. The Act has broadened the category of to whom the vehicle can be sold to include an individual who drove the vehicle during the term of the lease; officers, directors, or a partner of the lessee; or to a person who arranges for and conducts an auction of motor vehicles as prescribed by the Act, while still remaining within the contract disclosure exemption.

The circumstances change when a commercial lessor wishes to sell a motor vehicle at the end of the term of a lease to another registrant under the Act. Here, the commercial lessor must comply with the 25 mandated disclosure requirements. In order to obtain such information, commercial lessors will need to survey their lessees prior to the return of the leased vehicle in order to accurately reveal the required contractual information to the purchasing registrant.

If the dealer is not able to obtain the disclosure statement, which would typically occur if there is an insolvency, then the fleet lessor could only sell at auction.

Securitization and Ongoing Sale Problems

If a fleet lessor simply leases to its lessee and ultimately sells the vehicle to the lessee, then the new Act is more helpful than prior legislation. However, this is simply not commercial reality in the modern finance market. Most lessors need to obtain some manner of financing to expand their businesses. The most typical method, prior to the recent credit crunch, was the securitization market whereby the fleet lessor would sell its lease and often the vehicle to a special purpose entity (“SPE”) that would then issue notes into the market. The problem with the MVDA is that the transfer to the SPE would be seen as a “trade” and require disclosure. Accordingly, the fleet lessor would during the term of the lease be required to ask the lessee to provide a disclosure document that a lessee would likely be slow to comply with and perhaps be reticent to fill out, as it may not want to disclose problems. This concern also exists if companies sell portfolios to each other from time to time.

Options Outside the Scope of the Act

Needless to say, the new rules governing the motor vehicle dealer industry are significant and quite cumbersome. An alternative for a commercial finance company may be to provide equipment financing by way of a loan and security agreement as opposed to becoming a licensed motor vehicle dealer under the MVDA. A loan and security agreement provided by a financial institution to a borrower for the purposes of financing the purchase of a motor vehicle does not fall within the definition of a “trade” under the MVDA, and, as such, the financial institution's compliance with the Act is not required. One issue with this alternative option arises when the borrower-lessee acts on its rescission right under the Act. How then will the financial institution ensure its security under the loan?

As a potential remedy to this issue, the lending financial institution can build a provision into its loan and security agreement prohibiting the borrower from exercising its rescission right under the MVDA to ensure its security over the loan. While this appears to be a fairly simple remedy, it is uncertain whether a court would uphold such a provision. As the Act has yet to come into force, there is no case law to examine whether such a clause would be enforceable by a registered fleet lessor. It appears from the Act that a provision of the sort would be enforceable by the lending financial institution, as the MVDA specifically provides for an exemption to creditors who are not registered under the Act. This exemption however, does not extend to the registered motor vehicle dealer leasing the vehicle to the borrower-lessee. As well, it is unclear from the Act whether a registered motor vehicle dealer under the MVDA is able to contract out of the rescission rights prescribed under the Regulations to the Act.

The lending financial institution may also wish to consider entering into agreements directly with the registered motor vehicle dealer whereby the commercial finance company will hold funds in escrow for the dealer until the 90-day rescission period is over in order to secure the institution's loan to the borrower-lessee. Agreements of this nature will enhance the need for financial institutions to have vendor programs with motor vehicle dealers.

Conclusion

The MVDA's stated commercial intention of protecting consumers may have some rather inadvertent consequences. Loans may no longer be available, as the right to rescind may be too much of a risk for a commercial finance company to undertake. From the commercial lessors' standpoint, the regime should be helpful. They no longer need a registered salesperson, which should provide for some welcome relief to finance professionals who do not see themselves as car salespersons. On the other hand, more care needs to be taken in the actual lease document and the ability to sell the vehicle at the end of the term of a residual lease. Further, the lack of safe harbor rules and the likely chilling effect on the securitization market may have material adverse effects that more than offset the gains made under the Act. The delay of implementation is welcomed relief for car dealers and finance companies to come to terms with the many changes. It also may give the Ministry an opportunity to fix certain problems inherent in the Act.

Jonathan Fleisher is a partner in the Financial Services and Business Law Groups of the Toronto-based firm of Cassels Brock & Blackwell LLP. He has particular expertise assisting U.S. commercial finance companies, both public and private, with establishing operations in Canada, providing both legal and practical business advice. He is the only Canadian lawyer to sit on a sub-committee of the Equipment Leasing and Finance Association. His expertise also extends to all forms of debt finance, including sub-debt, venture financings, convertible debt, and asset-based lending and in enforcing creditors' rights and workouts. He may be reached at [email protected] or 416-860-6596.