Equipment Lessors, Beware

On Dec. 31, 2015, amendments to the conflict of laws provisions under the Ontario Personal Property Security Act (PPSA) will be active. Lessors should ensure that they search in the right jurisdictions and register their security interests in accordance with the new rules. A brief summary of the amendments is set out below.

Summary of Current Law and Amendments

Under the PPSA, the question of where to register in order to perfect a security interest is answered according to the type of collateral being granted as security. The amendments clarify the appropriate place to perfect security interests in the following:

1. Intangibles;
2. Mobile goods (i.e., goods normally used in more than one jurisdiction if the goods are equipment or inventory leased or held for lease by a debtor to others); and
3. Non-possessory security inter- ests in securities, instruments, negotiable documents of title, money and chattel paper (collectively, “Intangible and Mobile Collateral”).

Perfection of a security interest in Intangible and Mobile Collateral is governed by the law of the jurisdiction where the debtor (i.e., the lessee) is located. Currently, a debtor is deemed to be located at the debtor's place of business or at the debtor's chief executive office if there is more than one place of business. Since the PPSA does not define the term “chief executive office,” it is often unclear where a secured party should perfect its security interest in transactions involving Intangible and Mobile Collateral.

The amendments simplify the test for determining the location of the debtor by replacing the current rules under the PPSA with the rules set out in the chart below.

There are additional rules addressing registered organizations that are organized under the laws of the United States as well as trusts.

Since the equipment most lessors finance falls under Intangible and Mobile Collateral such as motor vehicles, trailers, and other heavy equipment that is usually used in more than one jurisdiction, lessors should pay careful attention to the new rules to determine where to register.

Transitional Rules

The amendments include transitional rules, the most significant of which are:

1. A secured party (i.e., the lessor) may rely on the old rules when amending, renewing or extending a security agreement that was entered into before Dec. 31, 2015 so long as the amended security agreement does not include additional collateral;
2. A security interest that was perfected under the old rules will continue as perfected until the earlier of the day registration expires or Dec. 31, 2020; and
3. A security interest perfected under the old rules will be deemed continuously perfected where steps are taken to register under the new rules before Dec. 31, 2020.

Other Provinces

Until other provinces change their conflict of laws rules to align with Ontario's new rules, secured parties may have to register their security interests in multiple jurisdictions. For example, for the Intangible and Mobile Collateral of a British Columbia-formed corporation that has its sole place of business in Ontario, the new rules under the Ontario PPSA state that British Columbia law governs the perfection of a security interest in that collateral and accordingly, a secured party should register under the British Columbia PPSA. However, the current rules under the British Columbia PPSA state that Ontario law governs the perfection of a security interest in that collateral and accordingly, a secured party should register under the Ontario PPSA. In cases such as this, a secured party should register under both the Ontario and British Columbia regimes in order to protect its security interest.

The expectation is that some provinces will follow the changes made to the Ontario PPSA in the coming months.

Key Items

The following are a few key action items for lessors:

1. Lessors should use the time before Dec. 31, 2015 to familiarize themselves with the amendments to the PPSA. Following Dec. 31, all security interests must be perfected in accordance with the new rules.
2. Existing security interests that may extend beyond Dec. 31, 2020, must be reviewed to ensure they are registered in the appropriate jurisdiction under the new rules.
3. Following Dec. 31, 2015, in respect of Intangible and Mobile Collateral, searches must be conducted by considering both the old and the new rules. In other words, lessors must search in all jurisdictions where the debtor is “located” under the old rules and where the debtor is “located” under the new rules.

[IMGCAP(1)]

Josh Calderon and Carla Potter are attorneys in the financial services group at Cassels Brock & Blackwell LLP in Toronto. Calderon's practice focuses on corporate finance matters, representing lenders and borrowers involved in domestic and international financing transactions and corporate reorganizations. Potter focuses on cross-border secured lending and financing transactions and in particular focuses on cross-border equipment and asset finance transactions. They can be reached at [email protected] and [email protected], respectively.

On Dec. 31, 2015, amendments to the conflict of laws provisions under the Ontario Personal Property Security Act (PPSA) will be active. Lessors should ensure that they search in the right jurisdictions and register their security interests in accordance with the new rules. A brief summary of the amendments is set out below.

Summary of Current Law and Amendments

Under the PPSA, the question of where to register in order to perfect a security interest is answered according to the type of collateral being granted as security. The amendments clarify the appropriate place to perfect security interests in the following:

1. Intangibles;
2. Mobile goods (i.e., goods normally used in more than one jurisdiction if the goods are equipment or inventory leased or held for lease by a debtor to others); and
3. Non-possessory security inter- ests in securities, instruments, negotiable documents of title, money and chattel paper (collectively, “Intangible and Mobile Collateral”).

Perfection of a security interest in Intangible and Mobile Collateral is governed by the law of the jurisdiction where the debtor (i.e., the lessee) is located. Currently, a debtor is deemed to be located at the debtor's place of business or at the debtor's chief executive office if there is more than one place of business. Since the PPSA does not define the term “chief executive office,” it is often unclear where a secured party should perfect its security interest in transactions involving Intangible and Mobile Collateral.

The amendments simplify the test for determining the location of the debtor by replacing the current rules under the PPSA with the rules set out in the chart below.

There are additional rules addressing registered organizations that are organized under the laws of the United States as well as trusts.

Since the equipment most lessors finance falls under Intangible and Mobile Collateral such as motor vehicles, trailers, and other heavy equipment that is usually used in more than one jurisdiction, lessors should pay careful attention to the new rules to determine where to register.

Transitional Rules

The amendments include transitional rules, the most significant of which are:

1. A secured party (i.e., the lessor) may rely on the old rules when amending, renewing or extending a security agreement that was entered into before Dec. 31, 2015 so long as the amended security agreement does not include additional collateral;
2. A security interest that was perfected under the old rules will continue as perfected until the earlier of the day registration expires or Dec. 31, 2020; and
3. A security interest perfected under the old rules will be deemed continuously perfected where steps are taken to register under the new rules before Dec. 31, 2020.

Other Provinces

Until other provinces change their conflict of laws rules to align with Ontario's new rules, secured parties may have to register their security interests in multiple jurisdictions. For example, for the Intangible and Mobile Collateral of a British Columbia-formed corporation that has its sole place of business in Ontario, the new rules under the Ontario PPSA state that British Columbia law governs the perfection of a security interest in that collateral and accordingly, a secured party should register under the British Columbia PPSA. However, the current rules under the British Columbia PPSA state that Ontario law governs the perfection of a security interest in that collateral and accordingly, a secured party should register under the Ontario PPSA. In cases such as this, a secured party should register under both the Ontario and British Columbia regimes in order to protect its security interest.

The expectation is that some provinces will follow the changes made to the Ontario PPSA in the coming months.

Key Items

The following are a few key action items for lessors:

1. Lessors should use the time before Dec. 31, 2015 to familiarize themselves with the amendments to the PPSA. Following Dec. 31, all security interests must be perfected in accordance with the new rules.
2. Existing security interests that may extend beyond Dec. 31, 2020, must be reviewed to ensure they are registered in the appropriate jurisdiction under the new rules.
3. Following Dec. 31, 2015, in respect of Intangible and Mobile Collateral, searches must be conducted by considering both the old and the new rules. In other words, lessors must search in all jurisdictions where the debtor is “located” under the old rules and where the debtor is “located” under the new rules.

[IMGCAP(1)]

Josh Calderon and Carla Potter are attorneys in the financial services group at Cassels Brock & Blackwell LLP in Toronto. Calderon's practice focuses on corporate finance matters, representing lenders and borrowers involved in domestic and international financing transactions and corporate reorganizations. Potter focuses on cross-border secured lending and financing transactions and in particular focuses on cross-border equipment and asset finance transactions. They can be reached at [email protected] and [email protected], respectively.