Good News for Lenders and Lessors: 5 Year Cap on PPSA Registrations for Consumer Goods to be Repealed

Good News for Lenders and Lessors: 5 Year Cap on PPSA Registrations for Consumer Goods to be Repealed

The five-year cap on registrations relating to consumer goods under the Personal Property Security Act (Ontario)[1](the “PPSA“), which is unique to Ontario, will be repealed on November 16, 2015. This change should reduce some of the administrative burden and overhead costs now imposed on lenders and lessors whose collateral includes consumer goods.

Section 51(5) of the PPSA now provides that where the collateral described in a financing statement is or includes “consumer goods” (defined to include “goods that are used or acquired for use primarily for personal, family or household purposes”), the financing statement is deemed to have a registration period of five years (regardless of its actual term) unless a shorter period is indicated; and section 51(6) provides that every financing change statement that extends (i.e., renews) the registration period for such a financing statement is deemed to extend the registration period for a five year period that begins at the time of its registration unless a shorter extension is indicated. These provisions are reinforced in sections 3(4)(a) and 5(2)(a) of the Minister’s Order made under the PPSA (the “Minister’s Order“)[2]for new registrations and renewals, respectively. In addition, section 54(2) provides that a fixture filing registered on title to real property in respect of fixtures that include consumer goods and any extensions thereof may not have an expiration date later than the fifth anniversary of the registration date. In other words, any registration made under the PPSA where the collateral is consumer goods is currently limited to a registration period of no more than five years.

While these provisions may not seem problematic at first blush, the five year cap on consumer goods registrations can prove to be an administrative headache and a potential trap for administrators of loan and lease portfolios where the collateral or leased property includes consumer goods. Consumer contracts for leases or extensions of credit (such as conditional sales contracts or chattel mortgages) secured by consumer goods can well extend beyond five years. If the secured party unwittingly elects a registration period of more than five years, the financing statement will not be rejected by the system but it will lapse after five years, leaving the lender or lessor unsecured for the balance of the registration period if a dispute ever arises. Even where the registration period does not exceed five years, the secured party still has to diarize the expiry date, register the renewal and send the applicable debtor notice as mandated by the PPSA. In addition to the administrative costs associated with interim renewals (costs which are often passed on to the consumer), there is a risk that the renewal will not be filed in time, jeopardizing the continuous perfection of the secured party’s security interest or, where another party acquires an interest in the collateral during the lapse period, possibly the secured party’s priority against other creditors. This risk is especially a concern for businesses that operate across Canada or are entering into the Ontario market without an understanding of the jurisdictional differences across Canadian provinces for personal property legislation: Ontario is the only jurisdiction in Canada with a limitation on registration periods for collateral that includes consumer goods.

Recognizing the potential issues that the five-year limit can create, the Business Law Agenda Stakeholder Panel recommended its repeal in its June 2015 report to the Minister of Government and Consumer Services.[3] In line with the panel’s recommendation, Schedule 35 to Bill 91[4], which received Royal Assent on June 4, 2015, will be proclaimed into force on November 16, 2015. This legislation repeals sections 51(5) and (6) outright, removing the deemed five-year cap, and amends section 54(2) to permit expiration dates beyond five years where fixtures include consumer goods. Conforming amendments will also be made to sections 3(4) and 5(2) of the Minister’s Order. This repeal will be a welcome change for many businesses and financial institutions that deal with leases of and loans secured against consumer goods in Ontario. One provision relating to consumer goods will not change, however: section 3(1) of the Minister’s Order will still require that financing statements classifying the collateral as consumer goods set out the principal amount and the maturity date (or a statement that there is none).

Transition and Next Steps

The amendments do not specify any transitional provisions and are not stated to be retroactive. Accordingly, existing registrations relating to consumer goods will for the most part be unaffected until they are renewed, in which case the renewal term can exceed five years. However, registrations against consumer goods erroneously made before November 16, 2015 for terms exceeding five years will no longer be deemed to expire at the end of five years: for example, if on June 1, 2014 a furniture retailer had registered a conditional sales contract for a living room suite for a seven year term, it will now expire on June 1, 2021, not June 1, 2019.

In recent years, the government has made some encouraging efforts to amend Ontario’s personal property legislation in response to recommendations of legal and business academics and professionals.[5] While there continue to be certain Ontario-specific issues that remain with respect to the PPSA[6], amendments such as the repeal of the five-year cap on consumer goods registrations contribute to harmonization between the provinces and with the US on secured transaction matters and better reflect the business realities of secured parties and consumers.

As this bulletin is intended only as a summary we would recommend that you review the amendments to the PPSA before they come into force using our bulletin as a guide.

If you have any questions about the amendments or about what actions to take to ensure that your security interests remain perfected, please do not hesitate to contact us. We would be happy to work with you to ensure the validity, perfection and priority of your security interests.

by Robert Scavone and Julie Han

1 Personal Property Security Act, R.S.O. 1990, c. P.10.

2 Minister’s Order under the Personal Property Security Act (available here).

3 Business Law Agenda: Priority Findings & Recommendations Report, June 2015 (available here), recommendation 4a(vii).

4 Bill 91, Building Ontario Up Act (Budget Measures), 2015.

5 See, for example, Maria Sagan and Rob Scavone’s bulletin, Where’s Waldo: New Ontario PPSA Debtor Location Rules Finally Coming Into Force.

6 For example, collateral classification in Ontario is based on a “check the box” system, as compared to other provinces that use a general collateral description.

A Cautionary Note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2015