The Law of Commercial Leasing in Canada 1999

5. Consumer Leases

5.1 Introduction

[131] The recent exponential growth in leasing as a device for the acquisition of personal use goods by individuals presents a range of consumer protection issues that are not addressed in any comprehensive manner under existing provincial or federal law. Although leases do fall within the scope of some provincial consumer legislation, that legislation generally fails to address issues unique to a leasing transaction.

[132] Issues specific to consumer leasing transactions have not been considered in the Canadian legal literature, nor are they evident in Canadian caselaw. In contrast, consumer protection in the context of lease transactions is the subject of a substantial body of American writing, and has long been on United States federal and state legislative agendas. While the absence of Canadian caselaw and commentary makes it difficult to determine the existence and extent of problems relating to consumer leasing in this country, one might reasonably assume that those identified in the United States consumer leasing market are replicated here. It is therefore appropriate to review the American legislative responses to consumer leasing issues as a background to consideration of the current state of Canadian law.

5.2 Consumer Protection Legislation in the United States

[133] A considerable body of federal and state legislation designed to address problems and inequities in the consumer leasing market already exists in the United States. The federal Consumer Leasing Act (often referred to as the CLA)149 and its implementing Regulation M150 impose significant disclosure obligations on lessors of goods acquired by individuals for personal or family use. However, the impact of the Consumer Leasing Act is considerably diminished by its anachronistic definition of scope, which is limited to consumer leases having a value of $25,000 or less.

[134] State legislatures have also taken an active role in the development of consumer leasing law, focusing in particular on the growing motor vehicle leasing market.151 However, a study committee on consumer leasing established by the National Conference of Commissioners on Uniform State Law concluded in 1995 that comprehensive uniform state legislation should be drafted. The committee's objectives were to provide leadership in an increasingly important filed of commercial activity and to pre-empt "piecemeal reactive legislation" responding to developing problems.152 The recommendations contained in the study report led to the drafting of the Uniform Consumer Leasing Act (UCLA),153 which will be presented for first reading to the NCCUSL this summer.154 The UCLA is designed to address gaps in existing statutory coverage, as well as to promote uniformity in state legislation.

[135] The UCLA responds to all of the broad issues identified by American commentators as most pressing, as well as to numerous others.155 It is worth noting that the comprehensive scheme of regulation embodied in the UCLA is not likely to be welcomed wholeheartedly by commercial lessors. The National Vehicle Leasing Association of the United States calls the present draft "extremely problematic," identifying a number of its aspects as points of particular concern.156

[136] The UCLA provides a focus for the following discussion.

5.2.1 Key Issues in Consumer Leasing under United States Law

[137] A consumer lease transaction raises a spectrum of potential issues, including unconscionability and disclosure, contract formation, terms, remedies and enforcement. However, five particularly significant areas of concern have been identified in the American literature. They are; pre-contract disclosure, default and early termination payments, risk of loss in connection with "gap" liability, excess wear and tear provisions and non- assignability.S157 These will be reviewed in turn, followed by consideration of additional issues arising in the consumer context.

[138] Disclosure of the cost of leasing: In the United States, a great deal of effort has been devoted to devising disclosure requirements that will both make the costs of leasing intelligible to consumers, and warn them of their risks and the consequences of early termination. The creation of an ideal formula governing global disclosure of the credit costs associated with a lease is a complex undertaking, and the definition of such a formula is beyond the scope of this study. However, it is worth considering two approaches offered by the UCLA and the federal Consumer Leasing Act.

[139] The Consumer Leasing Act, via its implementing regulation M, prescribes an extensive and detailed list of disclosures relating to the charges imposed on the lessee. In addition, it obliges automobile lessors to demonstrate how the scheduled periodic payment is derived using a mathematical progression based on the concept of capitalized cost, which loosely correlates to the total purchase price payable under a deferred sale contract. This mathematical progression includes disclosures of the "gross capitalized cost," the "adjusted capitalized cost," the "residual value (of the leased vehicle)," the "depreciation and any amortized amounts," and the "rent charge,"along with related descriptors158

[140] The UCLA adopts by reference all of the disclosure requirements of the Consumer Leasing Act and in addition proposes, somewhat controversially, a formula for calculation of an "Annual Lease Rate,"159 generally referred to as an ALR, which is a percentage figure comparable to the annual percentage rate in credit sale transactions.160

[141] The primary objective of those who support an ALR provision is to provide consumers a basis for effective comparison shopping. 161 However, others question the need for and the reliability of an ALR as an effective disclosure device.162 The ALR provisions of the UCLA are permissive rather than mandatory, in that they are applicable only to those lessors who chose to use a percentage lease rate in their lease advertising and disclosures.163

[142] The unique nature of lease financing and the widely diverse ways in which a lease transaction may be structured make it very difficult to define a perfect unitary measure of the cost of leasing. However, the difficulty faced by consumers attempting to understand the relative costs of diverse lease structures and contracts makes the imposition of some kind of uniform disclosure requirement an essential component of consumer leasing legislation. The up-front disclosure requirements of the Consumer Leasing Act and the UCLA enable consumers to make informed choices by providing some basis for understanding of the actual costs they are assuming, and for comparison shopping as between alternative lease providers.

[143] Early termination: Early termination costs have also been the subject of considerable discussion and legislative activity in the United States, particularly in the context of motor vehicle leasing.164 The legislation addresses both disclosure of early termination liability, and the substantive limitation of such liability.

[144] The UCLA provides that early termination provisions in a consumer lease must reflect "an amount that is reasonable in the light of the anticipated or actual harm caused by the early termination, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy." In addition, it provides a "safe harbour" formula for determination of early termination liability that is presumptively reasonable,165 and caps the amount of permissible early termination payments to ensure that the lessee is not charged more than she would pay if she made all the scheduled payments to the end of the lease. These provisions operate as a substantive limitation on the absolute amount of early termination liability and provide a basis for disclosure of early termination costs.166

[145] The need for clear disclosure of early termination liability cannot be overstated. As has already been seen, leases routinely entitle the lessor to recover all unpaid rentals and other payments due to the end of the lease term, subject to deduction for the disposition value of the leased goods and a discount for early receipt of rental monies and other costs saved. Although such liquidated damages provisions are clearly enforceable under current law, there is little doubt that most consumers would be astonished at the extent of their liability thereunder. From the consumer's point of view, they are being forced to pay for goods that have been surrendered to or repossessed by the lessor.

[146] A decision to adopt a substantive limit on early termination liability may be more controversial than statutory disclosure requirements, but is warranted provided that it is appropriately designed to enable the lessor to recover the actual loss of the benefits of performance without over-reaching.

[147] Other disclosure issues: In addition, the UCLA provides for conspicuous notices that the transaction does not confer ownership rights, clear disclosure of the lessee's insurance risks and obligations, blunt warnings to guarantors regarding the liability assumed, the pre- contractual provision of sample lease forms and provision of follow up information.167

[148] "Gap" liability: The issue of "gap" liability is explained as follows in the Reporter's Notes to the UCLA, §402,

When leased goods are destroyed, stolen, or otherwise become a total loss during the term of the lease, this event constitutes a de facto early termination of the lease. Although insurance will usually cover all or most of the current market value of the goods, there is typically a "gap" between that sum and the amount due to terminate the lease at that point.

[149] Lessors sometimes absorb these losses internally or protect themselves through insurance. However, "gap" liability is frequently imposed on the lessee, particularly in the context of motor vehicle leases, where such liability is most often to arise. If the leased goods are lost early in the term of the lease the "gap" liability may be substantial, because the down payment in the transaction may be small, and the amortization of the capitalized cost through the monthly rental payments occurs at a slower rate than the depreciation in value of the leased goods.168 Where lessees are subject to "gap" liability, lessors may offer "gap liability waivers" or "gap protection" at a price, thereby adding an additional cost to the lease.

[150] The consumer motor vehicle legislation of some states addresses this problem by requiring prominent disclosure of the potential liability of lessees for the gap amount, along with information on "gap" insurance protection that may be available through the lessor or otherwise.169 This approach does not relieve consumers of gap liability, but rather enables them to anticipate and manage the risk of its occurrence. The UCLA has taken a different route. It prohibits the imposition of gap liability on a lessee, except where the lessee has failed to maintain required casualty insurance or the loss of the goods was occasioned by the lessee's fraud, intentional conduct or gross negligence.170 As a result, lessors must absorb the risk of gap losses, and will distribute them through their overall pricing structure or insurance arrangements.171

[151] Excess wear and tear provisions: Charges under excess wear and tear provisions have also been the subject of concern in the United States leasing market, where there are indications that some consumers are unfairly required to pay substantial amounts for excess wear and use of leased goods. Again, this problem is most likely to occur in connection with motor vehicle leasing.172 The federal Consumer Protection Act obliges lessors to disclose their standards for excess wear and tear, which standards must not be unreasonable.173 The problem is similarly addressed in the UCLA by subjecting excess wear and tear provisions to a reasonableness standard. In addition, procedures are established to ensure that lessees receive timely notice of excess wear and tear claims, and to give them an opportunity to inspect the goods and, if necessary, resolve any dispute through an independent inspection.174

[152] Restrictions on assignment by lessee: Finally, some commentators have pointed out that the typical contractual prohibition against assignment of the lessee's interest effectively locks the lessee into the lease by preventing him or her from selling it should he or she become unable to maintain payments.175 A consumer lessee is thus seriously disadvantaged as compared with a consumer purchaser, who may re-sell the goods and apply the proceeds to his or her purchase obligations. The UCLA addresses this problem by way of a provision entitling a lessee to assign a lease of more than one year, subject to the consent of the lessor, which may only be withheld on the grounds of a good faith belief that the sublease or assignment would jeopardize its rights.176

5.2.2 Other issues raised by the Uniform Consumer Leases Act

[153] The UCLA responds to the five key areas of concern outlined above. In addition, it addresses a number of other issues relevant to Canadian consumer lessors,177 which will be briefly outlined. Notably, most its provisions apply both to lessors and to their assignees. The term "holder" is used in the Act as a catch-all reference to both groups.

[154] Good faith, unconscionability and misleading conduct: The UCLA stipulates that every contract or duty within the Act imposes an obligation of good faith in its performance or enforcement.178 While such an obligation is imposed under Canadian law in connection with a lessor's realization activities where the lease is a security lease falling within Part V of the PPSAs, the parties to a lease are otherwise not subject to a comparable duty of care.

[155] In addition, a consumer lease, or some of its provisions, may be rendered unenforceable on the grounds of unconscionability, assessed as at the time of contract formation. Unconscionable conduct inducing the contract or occurring in the collection of a claim arising under the lease may also be penalized through the grant of "appropriate relief," including statutory damages.179 In addition, consumers are encouraged to take action against unconscionable conduct through the provision that a successful claimant on those grounds will be awarded reasonable attorney's fees.180 In Canada, consumer lessors in most provinces are offered protection against unconscionability under the unfair business practices legislation discussed below. Otherwise, resort must be had to the general principles of contract law.

[156] Similarly, the UCLA contains a broad prohibition against misleading advertising, incorporating by reference the advertising rules of implementing Regulation M of the Consumer Leasing Act. It also prohibits advertisement of lease rates, unless they are calculated in accordance with the formula established in the Act.S181 In Canada, the misleading advertising provisions of the Competition Act in theory offer consumer lessees some protection,182 though there appears to be no evidence that they are in fact relied upon as a source of remedy. The provincial unfair business practices statues that apply to leases also confer a right of action for loss occasioned by misleading conduct. However, there is no uniform nation wide protection against misleading practices under provincial law.

[157] Implied warranties: The UCLA prohibits the use of specified terms in consumer leases, but does not, in its current draft form, imply any positive obligations regarding quality, performance, title or quiet possession of the leased goods.183 However, the UCLA may ultimately incorporate the Article 2A warranties by reference, thus rendering them subject to its own general prohibition against waiver. In the Canadian context, non-waivable statutory warranties addressing issues of quality, performance and uninterrupted use and enjoyment would be an appropriate component of a consumer leasing statute, since such warranties currently exist in only a few jurisdictions. The extension of supplier warranties to consumers in a finance lease should also be addressed.

[158] Since the UCLA does not directly address implied terms or other substantive contractual rights, it does not consider the implications of the lessee's acceptance or non- acceptance of defective goods. As was mentioned earlier, Article 2A contains complex provisions regarding the effect of acceptance, revocation of acceptance and the relationship between acceptance and damages. These questions are generally not addressed in the context of lease transactions by Canadian legislation, and the outcome determined by application of the common law principles governing discharge for breach is not entirely predictable. Any prospective uniform Canadian legislation should thus address the relationship between breach and rejection, giving special consideration to the rules appropriate to finance leases.184

[159] Hell or high water and cut-off of defence provisions: The UCLA makes no mention of the extension of supplier warranties to a lessee in a finance lease transaction, presumably on the ground that this is covered by Article 2A. However, the UCLA nullifies the operation of "hell or high water" contractual provisions in consumer leases.185 It also precludes waiver of defence or cut-off clauses that would protect the assignee of a lessor from claims for breach of express or implied warranties. The pertinent provision states that,

... [A] holder is subject to all claims and defenses arising from the lease which the lessee could assert against the lessor and, in the case of a finance lease, the supplier. A lessee's recovery from a holder under this subsection may not exceed amounts paid by the lessee under the lease.186

[160] Since a third party financer is almost always involved in a modern leasing transaction, either as an assignee or as lessor under a finance lease, such a provision is a necessary corollary of any meaningful attempt to provide warranty protection to consumer lessees.

[161] Prohibited terms: Contractual terms prohibited by the UCLA include "deemed insecurity" acceleration provisions, assignments of wages, and the grant of permission to enter premises or commit breach of the peace in repossession of the leased goods.187

[162] Delinquency and default charges: Delinquency and default charges are permitted, but being in the nature of liquidated damages, they must be reasonable in the light of stated factors. Late charges are conclusively reasonable if they comply with the formula provided. In addition, the pyramiding of late charges is prohibited.188 The substantive regulation of late charges is an appropriate protective device. Even if a lessor would be precluded by a Canadian court from enforcing such provisions on the ground that they are penal in nature, consumers are in practice likely to comply with demands for payment of such charges as are stipulated in the contract.

[163] Open-end leases: The UCLA in its current draft form permits open-end leases, but restricts the end-payment provisions to ensure that they reflect a reasonable approximation of the anticipated fair market value of the goods on lease expiration. As the Reporter's Notes indicate, the concern of the drafters is that an inflated estimate of residual value may leave the consumer subject to a substantial end-of-term liability if the goods depreciate more rapidly than expected. The provisions include a rebuttable presumption restricting the lessee's liability to an amount no greater than three monthly payments. Notably, the current draft has rejected the more radical alternative approach proposed in Draft 7, namely, the prohibition of open-end leases in the consumer context.

[164] Payment or trade-in pending approval of lease: A provision of the UCLA addresses the routine practice of entering into a lease with reservation by the lessor of the right to disapprove or cancel it if the customer's credit is not approved.S189 The customer will often have surrendered any trade-in, made front-end lease payments and taken delivery of the leased goods.190 Provision is made for expeditious return of trade-ins and refund of payments in the event the requisite approval is denied.

[165] Right to cure default: A consumer lessee must be given the opportunity to cure a default in payment once in every twelve month period. Payment of sums actually in arrears including default charges reinstates the terms of the lease. 191 This provision resembles the reinstatement provisions available to lessors under a security lease subject to the PPSAs, except that it is available only prior to repossession of the goods. The lessee is granted a grace period following default within which to effect cure. The provision appears to impose a minimal burden on lessors, while offering lessee's meaningful protection against both loss of the leased goods and the imposition of a substantial early termination liability.

[166] Repossession and disposition of goods: The UCLA provides for the repossession and disposition of leased goods and prescribes the manner in which the proceeds of disposition must be applied, in terms similar in some respects to those of the PPSA provisions regulating lessors' enforcement rights under a security lease.192 The lessee is liable for any deficiency after application of the "realized value" of the goods to the lessee's outstanding obligations under the lease. Provisions are made for the determination of the "realized value" so as to ensure that it represents the full value of the repossessed goods.193 Dispositions are subject to the commercial reasonableness standard that is similarly applied to a lessor's realization activities by the PPSAs.

[167] The imposition of clear statutory protocols and standards on repossessing lessors provides consumer lessees some assurance that the best possible value will be realized through disposition of the leased goods, thus minimizing their exposure to a deficiency claim. Such assurances are currently available in the context of security leases under the PPSAs. There is no reason why they should not be similarly available to lessees under non-security leases.

[168] Deficiency claims: The UCLA endorses the recovery of a deficiency against a consumer lessee. Given that modern leases function primarily as an alternative to the purchase of goods through funds acquired from third party lenders, lessors are entitled to the return on investment provided under the contractual payment schedule.194 However, non- compliance by the lessor with the statutory provisions governing repossession and disposition may appropriately trigger at least a partial loss of the deficiency claim. In the context of consumer security leases, some of the PPSAs provide that failure by the lessor to observe the statutory realization provisions raises a defence to any deficiency claim "to the extent that the non-compliance affects the ability of the debtor [lessee] to protect the debtor's interest in the collateral or makes the accurate determination of the deficiency impracticable."195 This seems an appropriate penalty.

[169] Penalties for non-compliance: Since the Act imposes no positive contractual obligations on the parties to a lease, it does not contemplate an action by the lessee for breach of contract. The lessee's remedies for breach of contract fall to be determined under the complex remedial regime of UCC Article 2A, discussed earlier. However, violations of the Act subject the holder to civil liability for "actual damages suffered as a consequence of the violation."196 In addition, statutory damages (established by regulation) are prescribed for violation of specified provisions, either by way of a flat dollar amount or some proportion of the lease obligation. The Reporter's Notes to Draft 7 indicate that the pertinent provisions are those that involve more serious misconduct that ought to be discouraged even though it may not produce measurable "actual damages" for the lessee. A successful lessee litigant is also entitled to costs and reasonable attorney's fees.

[170] No waiver of Act: Like most consumer protection legislation, the provisions of the UCLA are not waivable, except in settlement of a bona fide dispute or collection claim, provided such settlement is not unconscionable.

[171] Choice of forum restricted: The UCLA, like Article 2A, prohibits contractual designation of an inappropriate forum, thereby avoiding choice of jurisdictions with little consumer protection and ensuring that necessary litigation will take place in a jurisdiction convenient to the lessee.

[172] Electronic records: The UCLA responds to the realities of the modern world by providing for the recording and authentication of lease transactions in non-paper formats.

[173] Third party beneficiaries: The UCLA does not address the rights of third party family members and other foreseeable users who are injured by leased goods. Article 2A, however, dispenses with the traditional requirement of privity in defined circumstances.197 A similar approach to this problem appears in some provincial consumer legislation, in the context of sales.198

5.2.3 Scope of Consumer Leasing Legislation

[174] The UCLA raises two issues regarding the appropriate scope of consumer leasing legislation. The first relates to the definition of a consumer transaction. In other words, who is a consumer, and what features of the transaction are relevant to its inclusion in the Act? The second general issue is whether consumer leasing legislation should apply to a lease that is functionally a security agreement, in that the lessor retains a proprietary interest primarily as a device to secure payment of the sums due under the terms of the contract.

[175] The UCLA responds to the first question in a manner typical of consumer protection legislation. It applies only to leases by individuals who are acquiring the goods for primarily personal, family or household purposes.199 In addition, the transaction must fall within a prescribed monetary limit and time frame. Leases for a term of less than four months are excluded, as are transactions having a total contractual obligation of greater than $150,000.200

[176] The limitation as to term is designed to exclude such transactions as daily or weekly car rentals and temporary rentals of recreational equipment. The debate over the question of whether a "rent to own" transaction should be brought within the scope of the Act has been resolved in the negative, apparently on the grounds that a lessee under such an agreement can terminate at any time without liability for prospective payments.

[177] The limitation as to the value of transactions falling within the Act reflects the assumption that consumers acquiring payment obligations in excess of $150,000 with respect the acquisition of personal use goods are sufficiently sophisticated to protect their own interests.201 Whether that assumption is warranted is debatable, and the need for a monetary limitation may be open for further consideration. In favour of such a limitation is the argument that the statute's imposition of more onerous responsibilities upon lessors will increase the costs associated with such transactions, a consideration that becomes increasingly pertinent as the lessor's exposure expands.

[178] There is also room for consideration of whether small business lessees are less in need of protection than consumer lessees. The suggestion that the Act might extend to transactions involving a business lessee where an individual is personally liable for performance has not been implemented in the UCLA.

[179] The exercise of drawing lines delineating the parameters of a consumer lease largely involves articulation of what we instinctively view as a consumer transaction. However, the second general issue noted above involves a policy choice of a different kind. The UCLA, adopts the UCC Article 2A definition of "lease," so as to prima facie exclude from its scope transactions that are not considered leases under 2A. Since Article 2A explicitly provides that "creation of a security interest is not a lease",202 a transaction that is in substance designed primarily to secure payment or performance of an obligation falls outside the scope of both leasing statutes.

[180] As has been noted earlier, this distinction is anomalous. A lease that is designed to operate functionally as a device to secure performance of the payment obligations it creates nevertheless involves a "lease" component as well as a security component, in the same way that a secured installment sales contract involves a sale component along with a security component. In Canada, sales law governs the sales aspects of such a transaction, while the PPSA governs those aspects relating to the security function - specifically, priorities disputes and the enforcement of the security interest. There is no reason why a lessee should not be protected as to the "lease", that is, the acquisition and use of goods aspect of the relationship, especially in a consumer transaction.

[181] Having definitionally excluded security leases from its scope, the UCLA appears to be ambivalent about that choice. In Part 3 regarding lease terms and practices, it stipulates that a lease may provide for "a security interest in the leased goods".203 Accompanying provisions clarify that a security interest may not, however, be taken in other property of the lessee to secure payment of the lease obligation. This is consistent with the statutory protections conferred by other statutes on consumer purchasers. However, the provision seems to fundamentally contradict the position that a transaction that "creates a security interest" falls outside the scope of the Act.204 Regardless of how this inconsistency is resolved in the United States, it should simply be avoided by the drafters of Canadian legislation.

5.3 Canadian Law

[182] Consumer leases are, of course, subject to the common law principles discussed earlier, except to the extent that those principles are superceded by legislation. The legislation currently in place may be considered under four general headings; disclosure, implied warranties, unconscionability and unfair practices, and termination and enforcement.

5.3.1 Disclosure

[183] All provinces have statutes regulating disclosure of the cost of credit in consumer sales transactions, generally designated as cost of credit disclosure or consumer protection legislation. Few contain disclosure requirements applicable to leases, and those that do generally fail to address the disclosure issues described above.

[184] In Manitoba, the Yukon and the Northwest Territories, cost of credit legislation contains provisions applicable to hire-purchase transactions, but not to leases generally. 205 Since a contract of hire purchase is fundamentally a contract of sale, these disclosure provisions are not tailored to address the disclosure issues specific to lease transactions.

[185] British Columbia draws leases within the scope of its Consumer Protection Act by inclusion of lessors and lessees in the definitions of seller and buyer respectively, and of leases in the definition of "executory contract". Since the disclosure requirements thereby made applicable to leases are tailored to address consumer sale transactions, their application to leases is both functionally awkward and substantively incomplete. However, most of the disclosure issues identified above are addressed in the context of consumer motor vehicle leases by regulation under the Motor Dealer Act.206

[186] In Alberta, the Consumer Credit Transactions Act mandates disclosures specifically tailored to leases which, though formulated in fairly general terms, address many of the issues identified above.207 It does not, however, impose any substantive limitations on lessors rights, nor does it respond specifically or in detail to all of the problems considered in the American literature.

[187] Overall, Canadian consumer lessees enjoy far less protection than their purchasing counterparts.208 For the most part, they are left to the conscience of lessors in connection with the information provided as a basis for their leasing decisions.

5.3.2 Implied Warranties

[188]  In general, those provinces that make statutory provision for implied warranties of quality and title in consumer sales transactions extend the same protections to consumer lessees. In British Columbia, New Brunswick and Saskatchewan, non-waivable provisions imply such terms in all consumer lease contracts.209 However, in Manitoba, the Northwest Territories and the Yukon, comparable provisions are limited to contracts of hire purchase.210 In Ontario, Nova Scotia, Newfoundland, Prince Edward Island and Alberta, consumer buyers are protected only to the extent that the Sale of Goods Act implied conditions and warranties are not waived by contract, and consumer lessees are not protected at all.

[189] The tri-partite relationship between supplier, lessor and lessee comprising a finance lease is not addressed in any legislation. Thus, there is no general statutory provision for the extension of warranties of quality by a supplier to the lessee. Saskatchewan does impose liability for breach of the statutory warranties of quality on manufacturers,211 and British Columbia specifically provides that the express warranties and guarantees made by an automobile manufacturer are assigned to the consumer in motor vehicle leases. 212 These provisions may fortuitously impose some quality obligations on manufacturer suppliers.213

[190] Though consumer lessees may enjoy the benefit of warranties implied at common law, such warranties may be contractually excluded and are in any event neither readily accessible nor sufficiently well defined to offer meaningful protection.

5.3.3 Unconscionability and Unfair Practices

[191] Statutory coverage of consumer lease transactions is more comprehensive in connection with problems of unconscionability and misleading or exploitive business practices than in any other respect. Seven of the common law provinces have unfair business practices legislation of some kind, all of which applies to consumer lessees. Such legislation prohibits the making of false or potentially misleading representations, non-disclosure of material information or other conduct that is unconscionable or that inappropriately disadvantages consumer buyers or lessees. The prohibitions against such conduct are generally intended to extend to manufacturers and other supply line parties, as well as retail dealers. While the terminology of some statutes would encompass lessors who are simply providing a financial service, 214 others may be limited to those who are engaged in the business of providing the leased goods.215 A lessee who suffers loss as a result of prohibited conduct on the part of a lessor, manufacturer or other supplier is given a civil cause of action supporting a range of remedies, including recission and damages.

[192] This provincial legislation is complemented federally by the Competition Act, which contains misleading advertising provisions applicable to lease transactions by virtue of the definition of "supply."216

[193] Unfair business practices legislation is of some value to consumer lessees, though its practical effectiveness is limited by the need to resort to litigation as an enforcement device. 217 However, it is not an effective substitute for specific mandatory disclosure requirements.

5.3.4 Termination and Enforcement

[194]  Under Canadian law, a consumer lessee's default and termination liability is almost entirely determined by the terms of the lease, unconstrained by statutory regulation. This means that a lessor may, in the event of the lessee's default in making even a single payment, repossess the leased goods and sue for the balance of the payments stipulated to the end of the lease term, subject only to the contract law obligation to mitigate.218 Aside from considerations of substantive fairness, the general absence of mandatory disclosure requirements may leave the lessee with a significant unanticipated liability.

[195] The only legislative limitation on a lessee's termination or default liability lies in the British Columbia Motor Dealer Leasing Regulation enacted pursuant to the Motor Dealers Act.219 Under the regulation, deemed provisions in a lease contract stipulate that (a) where the consumer's end of term liability is based on the estimated residual value of the vehicle, such estimated value must be a reasonable approximation of fair market value at that time, and (b) where the consumer's liability relates to the difference between the estimated residual value and the actual fair market value of a motor vehicle at the end of term, that liability is limited to a maximum of the sum of three average monthly lease payments. These provisions, which resemble those of the United States Consumer Leasing Act and other American legislation, operate to protect consumer lessees under open-end vehicle leases from exorbitant end of term payment liabilities.

[196] Otherwise, a lessor's enforcement rights are only constrained by the realization provisions of the provincial PPSAs, provided the lease is in substance a security agreement.220 Under those provisions, the lessor is obliged to give notice prior to disposing of or electing to retain repossessed goods and is subject to a general statutory duty of good faith and commercial reasonableness in exercising its rights of realization. In addition, the consumer lessee who has fallen into arrears under the lease is entitled to reinstate the lease and resume the contractual payment schedule by remitting to the lessor any payments in default exclusive of the operation of an acceleration provision, along with the lessor's actual realization expenditures incurred to that point in time.

[197] Some of the PPSAs contain other provisions designed to protect consumers lessees (like other consumer debtors) in connection with the lessor's enforcement of the lease. Generally speaking, failure on the part of the lessor to observe the requirements of the Act may be raised as a partial defence to any deficiency claim, and will entitle the lessee to seek damages for any loss sustained as a result of that failure.See footnote 221 221 In some jurisdictions, a consumer lessee will automatically be entitled to a relatively modest sum by way of "deemed damages," in recognition of the difficulty of proving that the lessor's non-compliance with a statutory requirement has caused a quantifiable loss.222

[198] In British Columbia, a lessor must elect to either sue on the lessee's personal covenant to pay, or repossess the leased goods. If it elects action on the covenant, its proprietary claim to the leased goods is extinguished by judgment. If it elects to repossess the goods, the lessor will have no right to claim a deficiency.223

[199] Since the PPSA enforcement provisions pertain only to a security lease, their application will depend on the sometimes difficult preliminary determination that the lease is "in substance" a security agreement. 224

5.4 Conclusions

[200] If any attempt is to be made to create uniformity in Canadian leasing law, the consumer leasing market would appear to be its most appropriate subject. The unique nature of a lease transaction exposes consumers to significant potential liabilities, particularly in relation to early termination, that most would not fully understand or anticipate.225 These difficulties arise largely from the fact that consumer leases are in reality financing transactions - a fact fully understood by lessors. Overall, no consistent pattern of regulation of consumer leases emerges from current legislation. The coverage of consumer protection statutes is both limited and discrepant, and many of the provisions that do extend to consumer leases were designed to respond to the often different concerns of consumer purchasers.

[201] Three approaches to consumer protection legislation present themselves. First, one might simply make existing law governing consumer sales transactions applicable to leases. Secondly, uniform legislation governing consumer leases might be drafted for adoption by the provincial legislatures. Thirdly, uniform legislation might be drafted governing consumer lease and sale transactions, incorporating some provisions of general application and some differentiated to address the specific nature of the transactions of sale and lease respectively.

[202] The simple application of consumer sales legislation to leases is an unsatisfactory solution. Existing disclosure provisions designed to address consumer purchase and borrowing transactions do not translate intelligibly into meaningful disclosure of leasing costs. Moreover, they fail to address the most pressing and complex disclosure problems arising in a lease transaction. Specifically, they do not provide for (a) a unitary comparative disclosure standard that would facilitate full understanding of all of the costs of leasing and comparison shopping for the best terms, (b) disclosures relating to potential gap liability and other insurance risks, or (c) disclosure of early termination and end of lease liability, including termination liability under an open-end lease and excess wear and tear charges.

[203] Existing law is similarly unsatisfactory in connection with warranties of quality and uninterrupted possession. Many provinces make no provision for mandatory implied warranties in consumer transactions of sale, and existing Sale of Goods statutes are dated and poorly suited to the modern leasing market. Suitable remedial schemes for breach of warranty are lacking, as is any provision for warranty protection in the now commonplace finance lease transaction. In addition, standardized provisions governing the liability of lessors' assignees and the effectiveness of cut-off of defence provisions in a consumer lease are needed.

[204] The exercise by lessors of rights of enforcement, including rights of repossession and disposition of the leased goods, are only regulated in the context of a security lease falling within the provincial PPSAs, and the invocation of these provisions depends upon satisfaction of the preliminary "substance" test, referred to above. Canadian law offers nothing comparable to the provisions of the NCCUSL Uniform Consumer Leasing Act designed to address problems of excessive termination liability, fair determination of the residual value of the collateral for purposes of end-of-term payments, fair application of excess wear and tear standards and gap liability.

[205] These deficiencies, among others of less consequence, can only be remedied through comprehensive uniform legislation tailored to address the specific features of a lease transaction, including those of a finance lease. The objective in such legislation need not be to limit the substantive rights of lessors, insofar as they are exercised appropriately. Rather, it should be designed to ensure that lessees both understand the nature of the transaction and the liabilities they have assumed thereunder, and are protected against abuses. This might be accomplished either by way of a stand alone consumer leasing statute, or through legislation governing both sale and lease transactions in the consumer market. These alternatives will be addressed below, in the conclusion to this study.

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