The Lease of Your Worries: Preserving the Priority of a Lessor's Interest in an Asset

Written By Aaron Rankin, Denise Bright and Alexis Teasdale

Unless a long-term lease of an asset is registered in the Personal Property Registry (PPR), the leasing arrangement may fail to protect the priority of the lessor’s ownership interest. The Alberta Court of Appeal in Fast Labour Solutions (Edmonton) Limited v Kramer’s Technical Services Inc, 2016 ABCA 266 ("Kramer's") held that the owner and lessor of a valuable asset (a crane) had a lower-priority claim than an unsecured judgement creditor of the lessee. Any lessor who might be considered to be “regularly engaged in leasing goods” can avoid such outcomes by ensuring that leases longer than one year or leases that could be longer than a year based on possession or renewals are registered in the PPR.

Facts

An Iowa demolition company (“Kramer’s Iowa”) incorporated an Alberta operating company (“Kramer’s Alberta”) to facilitate the performance of a contract to dismantle facilities in Edmonton. Kramer’s Iowa leased a crane to Kramer’s Alberta but did not register a financing statement in respect of the lease (the “Lease”) in the PPR. The crane was in possession of Kramer’s Alberta for more than a year. A judgment creditor of Kramer’s Alberta, Fast Labour Solutions (“Fast Labour”), seized the crane to satisfy its writ of enforcement. There was evidence before the Court that Kramer’s Iowa did not regularly lease to arm's length third parties. The main issue before the Court of Appeal was whether Kramer’s Iowa’s interest in the crane ranked lower than that of Fast Labour because Kramer’s Iowa had not registered its security interest in relation to the Lease in the PPR.

Long Term Leases and the Personal Property Security Act (PPSA)

In order to generate a return on an asset, its owner must often part with possession while continuing to retain ownership. A lease is one legal arrangement to preserve the owner’s title. If the lease is long-term, however, third parties doing business with the lessee may assume that the lessee owns the asset. There is a perceived policy risk arising from this possible misperception. A third party doing business with the lessee might take note of the lessee’s ostensible ownership of the asset, and therefore take fewer steps to protect itself from the lessee’s contractual non-performance.

The PPSA addresses this possible policy risk by requiring the lessor to register its interest in the leased asset where the lease is for a term of more than one year. A security interest is not perfected unless it is registered in the PPR. Pursuant to the PPSA, a “lease for a term of more than one year” includes:

"i. a lease for an indefinite term even though the lease is determinable by one or both parties within one year after its execution,

ii. subject to subsection (3), a lease initially for one year or less than one year if the lessee, with the consent of the lessor, retains uninterrupted, or substantially uninterrupted, possession of the leased goods for a period in excess of one year after the date the lessee first acquired possession of the goods, and

iii. a lease for a term of one year or less that is automatically renewable or that is renewable at the option of one of the parties, or by agreement, for one or more terms, the total of which, including the original term, may exceed one year."

Thus a lease which is initially for less than a year may still need to be registered to protect the lessor’s interest.

It is important to note that “a lease involving a lessor who is not regularly engaged in the business of leasing goods” is excluded even if it is for more than one year. However, Alberta courts have held that whether a lessor is engaged in the business of leasing should be interpreted expansively.

Outcome of the Case

Kramer’s Iowa was held to be regularly engaged in the business of leasing goods to Kramer’s Alberta, and the Lease exceeded a year in duration. Therefore, because Kramer’s Iowa had not registered the Lease in the PPR, its interest was subordinate to that of the judgment creditor’s. priority in that property. The practical consequence was that Fast Labour Solutions could enforce against the crane to satisfy its writ of enforcement in priority to Kramer’s Iowa.

Takeaways

If a lease might be (or be deemed to be) for a term of more than a year, and if there is a possibility the lessor might be held to be regularly in the business of leasing goods, it is prudent to register a security interest at the PPR in respect to the leased assets. In considering the issue of whether a lessor is in the business of leasing goods, note that:

• if the lease is for a commercial purpose and is part of an overall business strategy in which a holding company owns all the assets of an enterprise and then leases them to their operating company, that may make the lease (if over a year) a security lease;
• in Kramer’s, the lessor sent monthly invoices for various pieces of equipment for several years which the lower court found showed a regularity in the activity of leasing; and
• it is not determinative how frequently leasing occurs, or that no profit is derived or intended to be derived from the leasing transaction: National Bank of Canada v Merit Energy Ltd (2001), 294 AR 1 at para. 55, 27 CBR (4th) 283.