Crop & Soil Service Inc. v. Oxford Leaseway Ltd.

Crop & Soil Service Inc. v. Oxford Leaseway Ltd. [Indexed as: Crop & Soil Service Inc. v. Oxford Leaseway Ltd.]

48 O.R. (3d) 291

[2000] O.J. No. 1372

No. C32850

Court of Appeal for Ontario

Finlayson, Labrosse and Weiler JJ.A.

April 27, 2000

Personal property security -- Security interests -- True lease -- Open-end lease -- Lease in substance a financing agreement -- Lease with option to purchase -- Lease being security interest -- Personal Property Security Act, 1989, S.O. 1989, c. 16.

A lease agreement with respect to a motor vehicle provided for monthly payments for the use of the vehicle and included an option to purchase after three years for a fixed price. The option price was stated to be "based upon an estimation of what we feel the wholesale market value of the vehicle will be at lease termination." However, the agreement further stipulated that if the lessee chose not to exercise the option to purchase, then the vehicle was to be returned to the owner to be sold at auction. If the vehicle was sold for more than the fixed price, the lessee obtained the surplus, but if the vehicle sold for less than the fixed price, the lessee was responsible for the shortfall. This lease was not a true lease but was an "open-end" lease and, in substance, a financing agreement. It was a security interest to be registered under the Personal Property Security Act.

APPEAL from a judgment determining the priority of a security interest in personal property.

Cases referred to Cronin Fire Equipment Ltd. (Re) (1993), 1993 CanLII 8493 (ON SC), 14 O.R. (3d) 269, 21 C.B.R. (3d) 127 (Gen. Div.); Finchside International Ltd. v. Roy Foss Motors Ltd. (1994), 29 C.B.R. (3d) 108, 10 P.P.S.A.C. (2d) 33 (Ont. Gen. Div.); HOJ Franchise Systems Inc. v. Municipal Savings & Loan Corp. (1994), 1994 CanLII 7480 (ON SC), 110 D.L.R. (4th) 645, 11 B.L.R. (2d) 282, 6 P.P.S.A.C. (2d) 302 (Ont. Gen. Div.); MTC Leasing v. National Bank Leasing Inc. (1997), 1997 CanLII 22761 (MB QB), 120 Man. R. (2d) 108, [1997] 9 W.W.R. 228, 34 B.L.R. (2d) 20, 49 C.B.R. (3d) 87, 12 P.P.S.A.C. (2d) 319 (Q.B.) [affd (1998), 131 Man. R. (2d) 135, 187 W.A.C. 135, [1999] 6 W.W.R. 587, 5 C.B.R. (4th) 248 (C.A.)]; Trexar Inc. v. Beckett (1996), 11 P.P.S.A.C. (2d) 356 (Ont. Gen. Div.) Statutes referred to Personal Property Security Act, 1989, S.O. 1989, c. 16, s. 2

David A. MacKenzie, for appellant. A. Duncan Grace, for respondent.

[1] BY THE COURT: -- Oxford Leaseway Ltd ("Oxford") appeals from the judgment of Kennedy J. ordering that the security interest held by Crop & Soil Service in two vehicles -- a 1996 Dodge Neon and a Dodge pick-up truck -- had priority over Oxford.

[2] The narrow issue on this appeal is whether Oxford was obliged to register its lease agreement under the Personal Property Security Act, 1989, S.O. 1989, c. 16 ("PPSA").

[3] Section 2 of the PPSA states that the Act applies to every transaction without regard to its form that creates a security interest, including a lease.

[4] If the agreement is a true lease in which no security interest was created, Oxford was not obliged to register it. If, on the other hand, the lease was in substance a financing agreement, then Oxford was obliged to register the agreement in order to obtain priority. It is acknowledged that Oxford did not register at all in the case of one vehicle and filed a late registration, that is of no purport, in the other.

[5] The appellant submits that the lease is a true lease in form and substance. One of the indicia of whether a lease is a true lease is whether the payments made during the term of the lease are payments for actual use of the vehicle. If so, the option to purchase at the end of the lease will be for fair market value.

[6] We agree with Kennedy J. that the real substance of the agreements in question is to secure financial payment and that they are not true leases. These are "open-end" leases and the options to purchase available to the lessee at the end of the leases are not true options in which the lessee may acquire the vehicle at fair market value. This type of arrangement is accurately described by Montgomery J. in HOJ Franchise Systems Inc. v. Municipal Savings and Loan Corp. (1994), 1994 CanLII 7480 (ON SC), 6 P.P.S.A.C. (2d) 302 at p. 309, 110 D.L.R. (4th) 645 (Ont. Gen. Div.):

While the form of contract between Municipal and the consumer is a "lease" under which the consumer has a right to possession for a term of months or years in exchange for a monthly stream of payments, the lessee does not fulfil his obligations to the lessor simply by making those monthly payments and by returning the vehicle in reasonable condition at the end of the lease. The lessee guarantees to the lessor that at the end of the lease the automobile will have a "residual value" in an amount specified at the commencement of the lease. At his or her option, the lessee may purchase the automobile for the "residual value" thus fulfilling his or her guarantee to the lessor. Alternatively, the lessor will sell the vehicle on a wholesale basis and deduct from the proceeds of sale the lessor's costs of sale, thus yielding the "net proceeds of sale". If the net proceeds of sale is less than the residual value, the lessee is obliged to pay the "deficiency" on demand.

The amount of the residual value is essentially a function of the monthly payment to which the "lessor" and the "lessee" have agreed.

. . . the lessor holds title to the automobile as security for the promise of the lessee to make the stream of payments stipulated in the lease and to purchase the vehicle at the end of the term of the lease by paying whatever principal amount of the debt is then left outstanding ("the residual value").

[7] In the result, Montgomery J. held that the lease in HOJ was in substance a financing arrangement.

[8] In Re Cronin Fire Equipment Ltd. (1993), 1993 CanLII 8493 (ON SC), 14 O.R. (3d) 269, 21 C.B.R. (3d) 127 (Ont. Gen. Div.), Rosenberg J. also held that a security interest is created when the property in question has a predetermined fixed value at the end of the lease and the lessee is entitled to the profits or responsible for a deficiency upon the sale of the property.

[9] Here, for example, the total value of one of the leases in question was $15,000. The amount of the buyout after three years was for $7,000. (The second lease was essentially the same.) The option to purchase is stated to be "based upon an estimation of what we feel the wholesale market value of this vehicle will be at lease termination." That is not, however, the actual situation. The agreement between the parties stipulates that factors such as excess mileage, poor interior or exterior, poor mechanical condition from lack of service, and changes in the market conditions could affect the value of the vehicle. The lease goes on to say that the lessee has to bear the result of any decrease in the market value of the vehicle. If the lessee chooses not to exercise the option to purchase, the vehicle goes back to the owner and is sold at auction. If the vehicles are sold for more than $7,000, the lessee, and not the owner, gets to keep the amount over $7,000. Conversely, the lessee is liable for any shortfall between the amount of the sale and $7,000. The amount of $7,000 represents the balance due and owing in respect of a debt obligation at the end of the lease. The obligations of the lessee are not fulfilled by the lessee simply making the rental payments and returning the vehicle at the end of the lease in good condition. The lessor holds title as security for the payments during the currency of the lease and in respect of the lessee's obligation to pay the sum of $7,000.

[10] In addition, it is clear from the amortization schedule that, in the event the vehicle is returned to the owner during the currency of the lease, the "lessee" is responsible for the amount of the value of the vehicle at that time. This is another indicia that the transaction is driven by the cost of ownership of the property in question as opposed to the cost of its use for a limited period of time.

[11] The decisions relied upon by the appellant, Finchside International Ltd. v. Roy Foss Motors Ltd. (1994), 10 P.P.S.A.C. (2d) 33, 29 C.B.R. (3d) 108 (Ont. Gen. Div.); Trexar Inc. v. Beckett (1996), 11 P.P.S.A.C. (2d) 356 (Ont. Gen. Div.); and MTC Leasing v. National Bank Leasing Inc. (1997), 1997 CanLII 22761 (MB QB), 12 P.P.S.A.C. (2d) 319, [1997] 9 W.W.R. 228 (Man. Q.B.), do not involve open-ended leases and are distinguishable on that basis. The lessee was not obligated to pay a fixed amount at the end of the lease irrespective of whether the option to purchase was exercised.

[12] Accordingly, for the reasons given, the appeal is dismissed with costs to the respondent.

Appeal dismissed.