An issue often faced by an auto leasing company and the party leasing a vehicle (the lessee) in British Columbia is what remedy is available in the event the lessee defaults on the lease payments.
The issue is whether the leasing company can only seize the leased vehicle on default by the debtor lessee or whether it can both seize the leased vehicle and sue the debtor lessee for any balance or deficit owing under the lease terms.
Under the law in British Columbia, this involves a determination as to whether the lease is considered a “security lease” under the BC Personal Property Security Act (PPSA) or whether the lease is considered a “true lease” in law.
Under the PPSA, there are different remedies available if there is a default by the lessee depending on whether the lease is a security lease or a true lease.
If the lease is a security lease, then the leasing company (lessor) is restricted to making an election of either suing the debtor or seizing the vehicle if the debtor defaults. In the case of a security lease, the lessor cannot take both steps as noted in Part 5 of the PPSA.
If the lease is considered a true lease, then the leasing company can both seize the vehicle and sue for amounts owing under the terms of the lease.
The PPSA does not specifically state what constitutes a security lease. Rather, it is necessary to consider whether the lease “secures” payment or performance of an obligation.
In considering whether the lease secures payment or performance of an obligation, there are several factors that may support a finding that the lease is a security lease. These factors can include:
- whether there was an option to purchase for a nominal sum;
- whether there was a provision in the lease granting the lessee an equity or property interest in the equipment;
- whether the nature of the lessor’s business was to act as a financing agency;
- whether the lessee paid a sales tax incident to acquisition of the equipment;
- whether the lessee paid all other taxes incident to ownership of the equipment;
- whether the lessee was responsible for comprehensive insurance on the equipment;
- whether the lessee was required to pay any licence fees for operation of the equipment and to maintain the equipment at his expense;
- whether the agreement placed the entire risk of loss upon the lessee;
- whether the agreement included a clause permitting the lessor to accelerate the payment of rent upon default of the lessee and granted remedies similar to those of a mortgagee;
- whether the equipment subject to the agreement was selected by the lessee and purchased by the lessor for this specific lease;
- whether the lessee was required to pay a substantial security deposit in order to obtain the equipment;
- whether there was a default provision in the lease significantly favourable to the lessor;
- whether there was a provision in the lease for liquidated damages;
- whether there was a provision disclaiming warranties of fitness and/or merchantability on the part of the lessor; and
- whether the aggregate rental payments approximate the value or purchase price of the equipment.
- whether there was an option to purchase for a nominal sum.
As outlined above, there are several factors to be considered.
Further, a particular lease may have some terms that are characteristic of a security lease while other terms of the lease that are similar to a true lease.
As the various lease terms can make the determination of the type of lease difficult, it is recommended that legal advice be obtained so that the rights of the lessor and the lessee are better understood in the event there is a default under the lease.
Partner, Foreclosures, Bankruptcy Law
Lindsay Kenney LLP – Vancouver office