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Consumer Protection (Ontario) Law - Sector-Specific
Chattel Leases (including Auto Leases)
(01 July 2013)OVERVIEW
1. General
(a) Chattel Leases Defined
(b) Appliances Included in Residential (RTA) Leases are Exempt
(c) 'Long-Term and Lease-to-Own' Leases (LT-LTO) Defined [CPA Part VIII leases]
(d) 'Other' Leases Defined [governed by CPA Part IV]
PART VIII CHATTEL LEASES
2. Disclosure Statements - Part VIII Chattel Leases
(a) Overview
(b) Key Disclosure Definitions
(c) Contents of Disclosure Statement
(d) Consequences of Non-Disclosure
3. Advertising (Representations) - Part VIII Chattel Leases
(a) Overview
(b) General Disclosure Requirements for Lease Cost Advertising
(c) Disclosure Requirements for Lease Cost Advertising in Specific Media
(d) Where Range of Leases Advertised
4. Lease Buy-Backs, Residual Obligation Leases (Open-Ended Leases) and Final Payments
(a) Overview
(b) The CPA Concept and Calculation of "Realizable Value"
(c) Extra "Realizable Value" Calculation Where Contractual Liability for Excessive Damage or Wear and Tear
(d) How to Calculate 'Final Payment' When Chattel Returned at End of Open-Ended (Residual Obligation) Lease
'OTHER' LEASES (PART IV LEASES)
5. 'Other' (Part IV) Chattel Leases
(a) Overview
(b) Disclosure Requirements for 'Other' Leases
CHATTEL LEASE REMEDIES
6. Chattel Lease Remedies
(a) General CPA Remedies Apply
(b) Early Termination of Leases
(c) Consequences of Non-Compliance with Lease Disclosure Duties
CAUTION
This chapter involves law from the Ontario Consumer Protection Act (CPA). Anyone considering using the CPA should first carefully sort out which of its rules apply to their situation. Do not assume that because you found the chapter dealing with the relevant economic sector that you have all the right rules.The steps to do this properly are explained at this link:
Identifying Which CPA Rules Apply to Your Situation
OVERVIEW
1. General
(a) Chattel Leases Defined
While this law is described in the CPA and it's General Regulation as that of 'leases', it is more accurately described as that of chattel leases. A 'chattel' is a commonly defined as moveable personal property - that is, property distinct from land and buildings (or 'real estate'). While chattels can become part of real estate by being securely affixed to them (for example a wired-in light fixture as opposed to a lamp that just plugs in), with chattels we are considering things that are naturally and freely moveable in their normal use - such as furniture, cars, appliances and similar.
This interpretation of CPA law [CPA 86-90 and General Reg 40,72-77] - the conclusion that it bears mostly on chattel leases - is brought about by the interaction of several related CPA provisions:- “lease” means a consumer agreement for the lease of goods [CPA 86],
- “goods” means any type of property [CPA 1], and
- "(t)his Act does not apply in respect of ... (f) consumer transactions for the purchase, sale or lease of real property, except transactions with respect to time share agreements as defined in section 20" [CPA 2(2)].
Basically, for these purposes there are two types of property, real and chattel - and CPA 2(2) makes it inapplicable to real property (ie. real estate). So all that left is chattel leases.
Logically, a lease term is "the period during which the lessee is entitled to retain possession of the leased goods" [CPA 86, Reg 40(3)]. “(L)essor” and “lessee” have a corresponding meaning" [CPA 86].
(b) Appliances Included in Residential (RTA) Leases are Exempt
Further excluded from this topic are "consumer agreement for the lease of goods in connection with a residential tenancy agreement" [CPA 86] - that is, residential leases governed by the Residential Tenancy Act, 2006 (the 'RTA'). In such arrangements, rental of the household chattels (eg. furnishings, refrigerator, stove etc) are part and parcel of the residential tenancy - ie. for a furnished or semi-furnished apartment.
Section 2 of the RTA expressly includes "furniture, appliances and furnishings" within the definition of "services and facilities" associated with a residential tenancy, and the RTA establishes procedures for addressing disputes respecting them (eg. if they are removed or added by the landlord). Residential tenancies are the subject of their own Isthatlegal.ca Legal Guide, and here I link to the chapter (and sections) that deal with chattels incidental to a residential tenancy: Residential Tenancies Law (Ontario), Ch.12: Other Rent Proceedings [scroll down to ss.3,4 and 5].
(c) 'Long-Term and Lease-to-Own' Leases (LT-LTO) Defined [CPA Part VIII leases]
The first of the two types of CPA chattel lease is the 'long-term and lease-to-own' (LT-LTO) lease, governed by Part VIII of the Act and related General Regulation provisions. LT-LTO chattel leases make up the largest and most elaborately-regulated category of lease. This category is addressed in sections 3,4 and 5 following, and applies to most auto leases.
'Long-term and Lease-to-Own' leases include the following [CPA 87]:- Term of Four-Months or More
The lease is for a fixed term of four months or more.
- Indefinite Term
The lease contract is for an indefinite term, or it is renewed automatically until one of the parties takes positive steps to terminate it. This provision should not be read to exclude fixed term leases (which are expressly anticipated in the Part VIII disclosure requirements) - it's just meant to clarify that non-fixed term leases are specifically Part VIII-governed.
- Residual Obligation Leases ['ROLs']
The CPA defines 'residual obligation leases' as leases where the owner of the chattel (the 'lessor') may require the consumer (the 'lessee', or the 'renter') to pay, at the end of the lease term, an amount based in whole or in part on the difference, if any, between [CPA 86]:
- the estimated wholesale value of the leased goods at the end of the lease term, and
- the realizable value of the leased goods at the end of the lease term.
This class of leases is the subject of extensive and complex regulation [see s.4, below], especially regarding the calculation of 'final payments' due when the lessee decides not to purchase the leased chattel at lease-end.
(d) 'Other' Leases Defined [governed by CPA Part IV]
. General
'Other' leases, the second category of CPA chattel leases, are subject to lighter disclosure regulation [discussed in s.6 below (*** verify)] than are 'Long-Term and Lease-to-Own' (LT-LTO) leases - at least with respect their lease terms. 'Other' leases are still subject to the (sometimes lengthy) general Part IV disclosure duties [eg. future performance, internet, direct etc consumer agreements]. A useful way to think of 'other' versus LT-LTO leases is that 'other' chattel lease are treated largely 'like any consumer agreement' [governed by Part IV], while LT-LTO chattel leases are given their own special lease regimen [governed by Part VIII]. In terms of the statute and regulation, 'other' leases all start at Reg 40(1), and take some effort to track through the multiple cross-references.
. Criteria and Necessary Qualifying Exemptions
To be in the category of 'Other' leases, the consumer transaction must both meet the following criteria and be excluded from Part VIII application, as follows [Reg 40(1) and 77, CPA 87]:- CPA Part-IV Governed
'Other' leases must be independently CPA Part IV-governed. CPA Part IV sets out extensive provisions regarding things like consumer disclosure, 'cooling-off' periods, contract terms and requirements and more for a range of contract forms, as follows [see Ch.3 "Forms of Consumer Agreements"] [Reg 40(1)(a), CPA ss.20-47.1]:
- Future Performance Agreements
- Internet Agreements
- Direct Agreements
- Remote Agreements
and for these sector-specific consumer transactions [see the sector-specific chapters of these names]:
- Personal Development Services
- Time Share Agreements
- Rewards Points
- Leases Part VIII Exempt by Virtue of CPA 87
Any consumer transactions that are categorized as 'Long-Term and Lease-to-Own' [see 1(c) above, 'Long-Term and Lease-to-Own' Leases (LT-LTO) Defined [CPA Part VIII leases'] cannot also be included in 'Other' leases [Reg 40(1)(b), CPA 87]. That is, Part VIII leases and Part IV leases are mutually exclusive.
- Leases Part VIII Exempt by Virtue of Reg 77
Leases that are not 'Long-Term and Lease-to-Own' (CPA Part VIII leases) - by virtue of the following features [Reg 40(1)(b), 77]:
- Goods Required to Provide a Service to the Consumer
This provision reads: "(I)f the leased goods are required in order for the lessor to provide a service to the lessee" - it's similar to the RTA appliance exemption, where the lease is incidental to be more primary 'service'; or
- Leases Where Periodic Payments Not Predictable At the Start
This provision reads: "if the periodic payments required under the lease may change during the lease term in such a way that it is not possible to determine, at the time the lessee enters into the lease, the amount of every periodic payment required under the lease or if, for any other reason, it is not possible to determine, at the time the lessee enters into the lease, the amount of every periodic payment required under the lease." This suggests to me periodic payments that are variable by virtue of such things as measurable degree of wear and tear, but I haven't seen any cases on it yet.
. Disqualifications
As well, if the lease is for any of the following goods or services then they cannot be in the category of 'Other' leases [Reg 35.1(1), 40(1,1.1)]:- Furnaces.
- Air conditioners.
- Air cleaners.
- Air purifiers.
- Water heaters.
- Water treatment devices.
- Water purifiers.
- Water filters.
- Water softeners.
- Duct cleaning services.
- Any goods or services that are a combination of or that perform the functions of the goods or services listed in any of paragraphs 1 to 10.
PART VIII CHATTEL LEASES
2. Disclosure Statements - Part VIII Chattel Leases
(a) Overview
The CPA provides for extensive disclosure requirements for leases governed by Part VIII. As leases can be fairly complex in their details the disclosure requirements are correspondingly complex (and long).
In any event, every lessor (the one granting possession of the chattel property) must deliver a written disclosure statement to the lessee (the one taking possession) before the execution of the lease or before the date the first payment is made, whichever is earlier. The disclosure statement may be contained in the lease or in a separate document (in whole or part) [CPA 89; CP Reg 74].
(b) Key Disclosure Definitions
For the accountants amongst us, definitions of the following terms are essential to understanding lease disclosure. Except as noted, they are all defined at this link [they are also linked when they are first used in sub-section (c) below]:CPA General Regulation, s.72:- "advance" [Reg s.72(1,5)]
- "annual percentage rate" [Reg s.72(1,2,3,4,10)"]
- "assumed residual payment" [Reg s.72(1,6)]
- "capitalized amount" [Reg s.72(1,7)]
- "estimated residual value" [Reg 72(1,8)]
- "implicit finance charge" [Reg s.72(1)]
- "lease value of the leased goods" [Reg s.72(1,8)]
- "periodic interest rate" [Reg s.72(1,9)]
- "residual obligation lease" CPA s.86
- "total lease cost" [Reg s.72(1)]
(c) Contents of Disclosure Statement
The disclosure statement must contain the following information [CPA 89; CP Reg 74].- Lease Statement
That the consumer agreement is a lease.
- Term Length
The length of the lease term or that the lease term is indefinite. The term is the time that the lessee is entitled to possession of the chattels [CPA 86].
- Description of Chattels
A fair and accurate description of the leased goods.
- "Lease Value of the Leased Goods"
For the CPA definition of "leased value of leased goods" see Reg 72(1,8) at this link: CPA General Regulation, s.72
- Advance Details
"The nature and amount of each advance to be made to the lessee in connection with the lease before or at the beginning of the lease term, including, without limitation, an advance for an expense to be incurred by the lessee in connection with the lease before or at the beginning of the lease term, even if the expense is not payable until after the beginning of the lease term."
For the CPA definition of "advance" see Reg 72(1,5) at this link: CPA General Regulation, s.72
- Initial Payment Details
The nature and amount of each payment to be made by the lessee in connection with the lease before or at the beginning of the lease term, other than a periodic payment.
- Periodic Payment Details
The timing and number of the periodic payments to be made by the lessee under the lease and the amount of each payment.
- Capitalized Amount
For the CPA definition of "capitalized amount" see Reg 72(1,7) at this link: CPA General Regulation, s.72
- Estimated Residual Value of the Leased Goods
For practical purposes, the "estimated residual value" of the leased goods is the lessor's estimate, made at the time of commencement of the lease, of the wholesale resale value of the goods at the end of the lease.
For the CPA definition of "estimated residual value" see Reg 72(1) at this link: CPA General Regulation, s.72
- Option Lease Details
An "option lease" is basically a lease where the lesse may, at the end of the lease term, purchase the leased item by making a payment additional to the regular periodic payments.
For the CPA definition of "option lease" see Reg 72(1) at this link: CPA General Regulation, s.72
In the case of an option lease:. when and how the option may be exercised,
. the amount of the additional payment that the lessee is required to make in order to exercise the option at the end of the lease term, and
. the manner of determining the amount of the additional payment that the lessee is required to make in order to exercise the option before the end of the lease term. - Residual Obligation Lease Details
These concepts are extensively discussed in s.4, below: "Lease Buy-Backs, Residual Obligation Leases (Open-Ended Leases) and Final Payments".
For the CPA definition of "residual obligation lease" see this link: CPA 86.
In the case of a residual obligation lease where the leased item is returned to the lessor (thus declining any buy-back option):. the amount of extra charges, other than 'final payment', that the lessee is required to pay to the lessor under the lease at the end of the lease term (eg. extra km charges, cleaning fee, auction fees, etc)
. a statement that the lessee's 'final payment' at the end of the lease term is the sum of,
A. the extra charges referred to above; and
B. the "estimated residual value" minus the "realizable value" of the leased chattels. - Lessor's Right to Early Termination of Lease
The circumstances, if any, in which the lessor may terminate the lease before the end of the lease term.
- Lessee's Right to Early Termination of Lease
The circumstances, if any, in which the lessee may terminate the lease before the end of the lease term.
- Amount of or Manner of Determining Payments on Early Termination
The amount or, if the amount cannot be determined at the time of the disclosure, the manner of determining the amount, of the payments, if any, that the lessee is required to make on early termination of the lease.
- Details Regarding Any Extra Charges
The circumstances, if any, in which the lessee is required to make a payment in connection with the lease that is not disclosed above and the amount or, if the amount cannot be determined at the time of the disclosure, the manner of determining the amount, of the payment. Such circumstances may include, but are not limited to, unreasonable or excessive wear or use [Reg 74(3)].
- Implicit Finance Charge for the Lease
For the CPA definition of "implicit finance charge see Reg 72(1) at this link: CPA General Regulation, s.72
This complex concept, which may roughly be equated with the credit agreement concept of 'cost of borrowing', is a crucial one for the advancement of a lessee's remedies consequent on non-disclosure or inadequate disclosure under these disclosure rules [see (d) below].
- Annual Percentage Rate for the Lease
For the CPA definition of "annual percentage rate" see Reg 72(1,2,3,4,10) at this link: CPA General Regulation, s.72
- Total Lease Cost
For the CPA definition of "total lease cost" see the link above at s.2(b): "Key Disclosure Definitions".
- Currency
The currency in which amounts are expressed, if it is not Canadian currency.
General requirements for CPA disclosure are explained at this link: General Disclosure Requirements.
(d) Consequences of Non-Disclosure
. Implicit Finance Charge
The consequences of non-disclosure - or inadequate disclosure - as required under s.2(c) above, pivot on the relatively obscure accounting concept of "implicit finance charge".
The formal definition of "implicit finance charge" is linked below for reference, but without going into the accounting intricacies of it, the "implicit finance charge" may be thought of roughly as the 'cost of borrowing' as that term is addressed respecting credit agreements in the sector-specific chapter entitled "Loans and Credit Agreements".
CPA General Regulation, s.72
Thankfully (except of course when the disclosure problem relates to the "implicit finance charge" itself), lessees may be relieved of this exploration into the accounting world by simply applying the "implicit finance charge" amount set out in the lease disclosure [see (c): "Contents of Disclosure Statement: Implicit Finance Charge for the Lease", above].
. Consequences of Non-Disclosure on Lessee's Liability for 'Implicit Finance Charge'
When no CPA-compliant disclosure statement is received by the lessee, then they are not liable to pay the lessor the 'implicit finance charge' [CP Reg 75(a)].
More specifically, where the implicit finance charge is understated in the disclosure statement, then the lessee need only pay that understated amount [CP Reg 75(b)].
3. Advertising (Representations) - Part VIII Chattel Leases
(a) Overview
The CPA regulates the 'representations' which are made respecting Part VIII leases. 'Representations' are defined generally in the CPA as [CPA s.1]: "representation" means a representation, claim, statement, offer, request or proposal that is or purports to be,
(a) made respecting or with a view to the supplying of goods or services to consumers, or
(b) made for the purpose of receiving payment for goods or services supplied or purporting to be supplied to consumers; In short, 'representations' relate to advertising and collection activities. As is the case with many sectors subject to CPA regulation, Part VIII lease 'representations' are subject to disclosure requirements. These particular requirements apply to anyone making, or causing to be made, representations respecting the cost of leasing, and as such primarily govern advertising - not collection - activities [CPA 88; CP Reg 73].
This section explains the two sets out disclosure requirements, the first general [(b) below], and the second an abbreviated version applicable to representations "broadcast on radio or television, displayed on a billboard or bus board or made through any other medium with similar time or space limitations" [(c) below].
General CPA law governing disclosure is explained at this link: General Disclosure Requirements.
All such Part VIII lease advertising, whether written, oral or otherwise must comply with these disclosure requirements.
Readers should be aware of the related advertising regulation of "unfair practices", which relates primarily to "false, misleading or deceptive" representations, and which is the subject of its own chapter [Ch.6: "Unfair Practices"].
(b) General Disclosure Requirements for Lease Cost Advertising
Generally, advertising representations respecting leases to which Part VIII applies must disclose the following [Reg 73(2)]:- Lease Statement
That the consumer agreement is a lease.
- Term Length
The length of the lease term or that the lease term is indefinite, as applicable. A term is the time that the lessee is entitled to possession of the chattels [CPA 86].
- Initial Payment Details
The amount of each payment to be made by the lessee in connection with the lease before or at the beginning of the lease term, other than a periodic payment.
- Periodic Payment Details
The timing and number of the periodic payments to be made by the lessee under the lease and the amount of each payment.
- Extra Charges Payment Amounts
For all extra charges applicable in the "ordinary course of events": the amount or, if the amount cannot be determined at the time of the disclosure, the manner of determining the amount, of the payment.
- Excess Kilometre Charges
For a motor vehicle lease with an allowance of less than 20,000 kilometres a year, the amount or, if the amount cannot be determined at the time of the disclosure, the manner of determining the amount, that the lessee will be charged for exceeding the kilometre allowance.
- Annual Percentage Rate for the Lease
When the annual percentage rate for a lease is disclosed, it shall be disclosed as prominently as the most prominently disclosed amount of any payment that forms part of the total lease cost [CP Reg 73(4)].
- Currency
The currency in which amounts are expressed, if it is not Canadian currency.
(c) Disclosure Requirements for Lease Cost Advertising in Specific Media
Generally, advertising representations respecting leases to which Part VIII applies, and which are "broadcast on radio or television, displayed on a billboard or bus board or made through any other medium with similar time or space limitations" must disclose the following [Reg 73(2,3)]:- Lease Statement
That the consumer agreement is a lease.
- Initial Payment Details
The amount of each payment to be made by the lessee in connection with the lease before or at the beginning of the lease term, other than a periodic payment.
- Periodic Payment Details
The timing and number of the periodic payments to be made by the lessee under the lease and the amount of each payment.
- Currency
The currency in which amounts are expressed, if it is not Canadian currency.
Disclosure is also required regarding the lease's term length (or if it has an indefinite term) and the 'annual percentage rate' [explained in (b) above] but there are three different ways in which such disclosure may be made [CP Reg 73(3)], either:- directly, in the same fashion that the above disclosure was made;
- by the provision of a toll-free phone number whereby that information will be disclosed;
or
- by reference to an advertisement that contains the information "and that is published in a publication having general circulation in the area of the radio or television broadcast, the area of the billboard or bus board display or the area covered by the other medium, as the case may be."
When the annual percentage rate for a lease is disclosed, it shall be disclosed as prominently as the most prominently disclosed amount of any payment that forms part of the total lease cost [CP Reg 73(4)].
(d) Where Range of Leases Advertised
When one advertisement advertises a range of different leases, the disclosure requirements are satisfied if given for one 'representative' example lease, which fact must be stated in the advertisement [CP Reg 73(5,6)].
4. Lease Buy-Backs, Residual Obligation Leases (Open-Ended Leases) and Final Payments
(a) Overview
Still dealing just with Part VIII chattel leases here. This section will be of particular interest to those dealing with 'rent-to-own' auto and other similar leases.
In lay usage there are 'close-ended' leases and 'open-ended leases. Leases are close-ended in that they simply end when their term expires and the leased chattel is returned, typically only subject to further charge in the event of excess damage or excess wear and tear.
On the other hand, an 'open-ended' lease, common in auto leasing, anticipates the possibility of a final 'balloon' payment at the end. This gives rise to the CPA 'legal' term used to describe them: "residual obligation leases".
'Residual obligation leases' are usually associated with a purchase (buy-back) option [an "option lease: CP Reg 72"], with the buy-back price being a usually lessor-generous (or hyped: "guaranteed") valuation (made at the beginning of the lease) of the anticipated resale value of the car at lease end [the "estimated residual value"].
Accordingly, when the car is returned at lease-end, the (pre-CPA) calculation of the lessee's 'final payment' is usually premised on the difference between the 'estimated residual value' and the actual sale realization of the now-used vehicle. In short - under the lease on it's face (before the CPA rules are applied) the lessee is expected to 'make good' for any shortfall in the auction price of the vehicle, bringing the lessor's realization up to the level of the lessor's self-assigned "estimated residual value".
Note that the CPA does not regulate the amount or calculation of a buy-out charge (estimated residual value) where the lessee wants to buy-back at the end of the lease term, other than to require that the final charge, or its manner of calculation, be included in the disclosure information set out in s.2(c) above ["Disclosure Statements for Part VIII Chattel Leases: Contents of Disclosure Statement: Residual Obligation Lease Details"].
However, it does regulate the final payment due when the lessee returns the vehicle, declining the buy-back option. In fact, it is the manner in which this final payment is calculated that defines a "residual obligation lease" [CPA 86]: "residual obligation lease" means a lease under which the lessor may require the lessee at the end of the lease term to pay the lessor an amount based in whole or in part on the difference, if any, between,
(a) the estimated wholesale value of the leased goods at the end of the lease term, and
(b) the realizable value of the leased goods at the end of the lease term. The potential for abuse here by lessors is obvious, and it has not gone unexploited. In past, lessors - comfortable that the lessee is bound to 'make good' on any liquidation shortage - have been less than aggressive in ensuring that the true market value of the-now used vehicle is fully realized. As well, situations have arisen where lessors have collaborated with non-arm's-length auctioneers to re-purchase the same car at low price, thus both maximizing the original lessee's liability, and repurchasing the original car at low or no cost (effectively 'buying it from themselves' at a manipulated optimal price).
(b) The CPA Concept and Calculation of "Realizable Value"
When the lessee returns the leased chattel at the end of an open-ended lease, the CPA concept of "realizable value" becomes relevant.
The CPA has created an incentive for the lessor to obtain the maximum resale realization they can when liquidating returned cars, in order ultimately to ensure that the consumer is not charged an excessive 'final payment'. This is done by replacing the easily-manipulated resale realization with the concept of 'realizable value'. If the resale realization is not high enough, CPA law dictates a higher 'realizable value' so that when the new higher "realizable value" is deducted from the original wholesale estimate ('estimated residual value'), the lessee's final payment is reduced to a fairer level.
Note that where the lease contains servicing provisions respecting the leased goods, and the lessee did not have the option of declining such provision, then any reference to the leased goods in the terms "realizable value" shall be taken as including such services [Reg 72(8)].
Realizable Value is the highest of the following three amounts [CP Reg 76(2)]: A. the actual, realized sale price of the chattel
B. 80% of the 'estimated residual value' (the contractual buy-back price)
C. 'estimated residual value' minus the value of three regular instalments Where the market realization (A) is higher than the 'estimated residual value' (aka buy-back price) then the concept of "realizable value" in effect becomes inoperable as the final payment charged to the lessee should be minimal (eg. transaction charges or even zero). Theoretically the result would be the same as under pre-CPA business practices.
When however - as is commonly the case - the resale price falls well below the original buy-back price ('estimated residual value') then either B or C will normally apply.
For B to be higher than C, 20% (100-80%) of the estimated residual value must be lower in amount than three regular instalments made throughout the lease. With car leases this is rarely the case as instalments are typically spread over several years to keep monthly payments low, and as estimated residual values are often artificially-inflated as they also act as the 'buy-back' price.
As will be clarified in (c) below, the use of the C figure for realizable value creates a guaranteed high 'realizable value', so that when it is deducted from the residual obligation value (buy-back price), the final payment is always relatively low. Only by achieving a high actual resale price can the lessor hope to obtain a greater benefit from the lease end dealings - precisely the incentive goal of this CPA regulation.
(c) Extra "Realizable Value" Calculation Where Contractual Liability for Excessive Damage or Wear and Tear
In provisions that have likely confused many regarding both comprehension and application, the CPA [CP Reg 76(3,4)] attempts to integrate into the above 'realizable value' calculation an additional factor to, when necessary, reflect the value of excessive damage and wear and tear (ie. more than 'normal' and expected) for which the lessee is contractually responsible.
This additional calculation does not apply where the A figure for realizable value is used, likely on the reasoning that higher-than-expected auction realization has negated any allegedly 'excessive' damage or wear and tear.
However, when these rules do operate, they do it like this [CP Reg 76(3,4)]:- if B is greatest, then it is further reduced by the product of (B - C) multiplied by a percentage figure reflecting how much of the wear and tear is due to excess or abuse
- if C is greatest, then it is further reduced by the product of (C - A) multiplied by a percentage figure reflecting how much of the wear and tear is due to excess or abuse
Example Calculation:
Assume facts for a car lease where the original buy-back figure (residual obligation value) was $10,000 and that monthly payments were $500.
Further, to reflect the typical car lease situation let us assume that the resale realization was low at $5,000 (which automatically eliminates the A calculation for 'realizable value').
Assume also that the 'percentage figure reflecting how much of the wear and tear is due to excess or abuse' is pegged by the lessor at 50% (call this factor "E").
Before any additional calculation for 'excessive damage and wear and tear', the calculations go like this:
A = $5,000 (actual resale realization)
B = $8,000 (80% of estimated residual value)
C = $8,500 [$10,000 - (3 x $500)] (estimated residual value minus three times monthly instalment)]
Now let's apply the 'excessive damage and wear and tear' factor (E).
As 'C' is the highest figure here, the additional 'excessive damage or wear and tear' calculation (to arrive at the new 'realizable value') goes like this:
Realizable Value = C - [E x (C - A)]
= $8,500 - [.5 x (8,500 - 5000)]
= $8,500 - $1,750
= $6,750
Of course, if the B figure was highest then the calculation formula would be:
Realizable Value = B - [E x (B - C)] The obvious oppourtunity for lessor manipulation here is in dictating an unrealistically high percentage of 'wear and tear' as being excessive. Such disputes would have to ultimately be resolved in Small Claims Court where judges generally have little experience of these intricacies of this CPA.
(d) How to Calculate 'Final Payment' When Chattel Returned at End of Open-Ended (Residual Obligation) Lease
Regardless of whether A, B or C are used in the determination of "realizable value" (above), the formula to calculate the 'final payment' for a residual obligation leases is as follows [CPA 90(2), CP Reg 76(1)]: X = P + (V - R)
Where:
X = Final Charge
P = Extra Charges
These are ancillary contractual charges due, other than the final payment.Explanatory Note: P is defined in Reg 76(1) as only applying where the 'realizable value' equals (and it should read: "or exceeds") the buy-back (estimated residual value) price (which could only happen with a high sale realization where the A option for "realizable value" is highest). If that happens then the final charge could only be zero, as the lessor has been fully, perhaps even excessively, compensated. Therefore P is 'other' ancillary charges such as normal cleaning, extra km charges, auction disbursements, etc. Charges for excessive (ie. above normal) damage and wear and tear should not be included here as they are dealt with as per (c) above.
V = Estimated Residual Value
This is the contractual 'buy-back' price stated in the initial lease contract.
R = Realizable Value
This is the concept explained in detail above.
Example Calculation:
To demonstrate the operation of the CPA regulatory scheme in it's intended form, I will use figures that generate 'C' as the 'realizable value'.
Assume facts for a car lease where 'extra charges' (P) (for auction sales, normal car cleaning, etc) are $1000, that the original buy-back figure (residual obligation value) was $10,000 and that monthly payments were $500.
Further, to reflect the typical car lease situation let us assume that the resale realization was low at $5,000 (which automatically eliminates the A calculation for 'realizable value').
Further, assume a three-year lease term (which will eliminate the B 'realizable value' calculation as 20% of the Estimated Residual Value ($2,000) is more than three lease payments (3 x $500 = $1,500).
Under those facts, a 'final payment' ('X') calculation would go like this:
First we calculation 'Realizable Value' (using C) as the:
R = $10,000 - (3 x $500) = $8,500
Then the main calculation:
X = P + (V - R)
X = $1,000 + ($10,000 - $8,500) = $2,500 Note that, after the $1,000 is deducted for extra charges, the remaining $1,500 figure is three times the monthly payment. This result will recur in all scenarios where the C figure is used as the 'realizable value', and it will almost always be the most beneficial to the lessee.
For comparison, see that without the intervention of CP Reg s.76 the calculation would be:X = P + V - Actual Resale
X = $ 1,000 + $10,000 - $5,000 = $6,000 This plainly creates an incentive for the lessor to maximize true resale, as often they will be losing dollar for dollar the amount by which resale realization falls short of the above typical 'Realizable Value' figure.
In effect then the use of the C figure for 'Realizable Value' creates a 'minimum standard' such that the most that the lessee will end up paying as a 'final payment' is three monthly instalments, plus any contractual extra charges.
'OTHER' LEASES (PART IV LEASES)
5. 'Other (Part IV) Chattel Leases
(a) Overview
"Other" chattel leases is a very awkward term for which I apologize, but I really can't think of a better one at present. As is noted in s.1(d), this class of lease is comprised of those leases expressly excluded from Part VIII General coverage (which are addressed in ss.2-4 above), and which attract Part IV coverage (eg. being formed by a direct, internet, remote agreement) or by being a future performance agreement [CP Reg 40(1)].
To determine any Part IV aspects to your lease I refer readers to Ch.3: "Forms of Consumer Agreements"], and for the 'Part VIII-excluded' aspect I refer you to s.1(d) above. Leases which fall into both of those categories are what I call 'other' leases and are subject to the disclosure requirements set out in (b) below.
(b) Disclosure Requirements for 'Other' Leases
The CPA policy intention here is to provide consumer disclosure focussing on a few primary issues, particularly that such consumer agreements are not agreements of purchase and sale conveying title in the subject goods, but that they are leases - passing only a temporary possessory interest.
For these purposes, the CPA requires that such leases must - in addition to any Part IV-mandated disclosure duties [see Ch.3: 'Forms of Consumer Agreement'] - also "set out" (ie. disclose) the following [CP Reg 40(2)]:- No Title Transfer
That the lease does not transfer title to the leased goods to the lessee.
- Penalties and Standards for Excessive Wear or Use
The penalties, or the manner of determining the penalties, that may be imposed on the lessee for unreasonable or excessive wear or use of the leased goods and the standards that will be applied to make such determinations.
- If Option Lease, Terms
An "option lease" is essentially a lease with a 'rent-to-own' option exercisable by a final additional payment [Reg 72]. If the lease is an "option lease" the disclosure must include:
- when and how the option may be exercised,
- the amount of the additional payment to exercise the option at the lease-end,
- the manner of determining the amount of the additional payment that the lessee is required to make in order to exercise the option before the lease-end.
- Liability of Lessee on Early Termination
That on early termination of the lease by the lessee, the lessee is not liable for more than the sum of the following amounts:- the periodic payments due on or before the day the lease is terminated that have not already been paid,
- the expenses incurred by the lessor for the removal of the leased goods from the possession of the lessee, and
- the penalties, if any, that may be imposed on the lessee for unreasonable or excessive wear or use of the leased goods.
Nowhere is it expressly stated that such disclosure must be in writing, but such disclosure is still governed by the general CPA requirements for disclosure (which may effectively require writing in some circumstances) explained at this link: General Disclosure Requirements.
CHATTEL LEASE REMEDIES
6. Chattel Lease Remedies
(a) General CPA Remedies Apply
While there are several chattel lease-specific remedies considered in this chapter (summarized and referred to below), both General (Part VIII) and 'Other' chattel leases - and for that matter any other chattel lease that meets the definition of a "consumer agreement" - are also subject to the general CPA rules set out in this Isthatlegal.ca Consumer Law (Ontario) Guide.
In particular, 'consumer agreements' by virtue of their inclusion in the larger class of 'consumer transactions' [CPA 1], attract the protection of the CPA 'General Consumer Rights' [set out in Ch.5], the CPA 'General Civil Remedies' of rescission, cancellation and civil action [discussed in Ch.7], and the 'Unfair Practices' CPA provisions [discussed in Ch.6] (in cases of serious misrepresentation these should be reviewed). Finally, most CPA instances of non-compliance may also be addressed through the "Administrative Enforcement" procedures discussed in Ch.8 - and many through regulatory prosecution as discussed in Ch.9.
The most potent general remedy against any form of CPA non-compliance is that discussed in Ch.7, s.3(c) ["CPA Civil Remedies: General Rescission or Cancellation Remedies: General Rescission Right on Non-Compliance by Supplier"]. As a general deterrent to suppliers' attempting CPA-prohibited practices, a consumer agreement which is not "made in accordance with this Act and the regulations" is not binding on the consumer [CPA s.93(1)].
In particular in this chapter, the provisions respecting "Lease Advertising ("Representations")" in s.4 do not have any specific remedies set out for them, so they would fall only under these general CPA remedial provisions. This holds for non-compliance with the disclosure requirements of 'Other' leases set out in s.6 as well.
Other, lease-specific remedial provisions are summarized next below.
(b) Early Termination of Leases
. Overview
While the CPA provides authority for the CPA General Regulation to address and regulate the situation of early breach of the lease contract (commonly by a consumer returning the leased chattel early) [CPA 90(1)], the Regulation does not contain any rules taking up this authority.
As a result, the situation falls to be governed under either of two legal frameworks: the lease terms or the common law of damages.
. Termination Charges Set Out in the Lease
A lease may contain provisions as to 'termination charges' due on such early repudiation of the lease. Unless such charges are so onerous and unfair as to be considered 'penalties' by a reviewing court, those contractual provisions will probably be applied in the determination of what the lessee owes the lessor in the event of early breach.
Generally, the doctrine of 'penalty clauses' hold that charges on default by a party will only be upheld by a court to the extent that they reflect reasonable pre-estimates of the losses that the non-breaching party will incur from the breach [see the 'Penalties Clauses' section of the Contracts section].
. Common Law of Damages
Here I explain the common law damages situation assuming the more frequent situation of a lessee repudiating a lease, typically done by simple return of the leased goods (though making repudiation plain with a note would be prudent, keeping a copy). The general principles of damages law would be the same if the lessor terminated the lease early, for example by the unjustified seizure of the leased goods.
Where there is no contractual anticipation of early lease termination by the provision of a 'termination charge', or where there are - but the termination charges are too punitive to be upheld (ie. are held to be a 'penalty clause') - then the situation of early lease termination will be governed by the common law of damages.
Briefly, that law requires that the lessor is entitled to their 'expectation value' of the contract, minus whatever they have or reasonably could have recovered by 'mitigation'. 'Expectation value' means that the lessor is entitled to sue for their anticipated net profit on the lease, or the money (after or 'net' of business expenses) that they 'expected' to make on it had it been fully honoured by the lessee.
'Mitigation' means that the lessor is not entitled to just sit back, leave the leased chattel unused and claim the full amount of the breached contract. The law of damages has a general principle that a plaintiff cannot recover losses that it could have avoided - an aspect of a public policy against waste. Typically this is done in a lease situation by re-leasing it. Where the lessor does not engage in reasonable and available 'mitigation' efforts, courts will normally estimate an amount that they 'should have' earned and apply this in reduction of damages anyway.
(c) Consequences of Non-Compliance with Lease Disclosure Duties
The remedies available to a lessee where the required lease disclosure [see s.2(d): "Disclosure Statements for Part VIII Chattel Leases: Consequences of Non-Disclosure", above] is completely or partially inadequate, all relate to the concept of "implicit finance charge", a concept that may be roughly interpreted as 'cost of borrowing'.
Generally, where disclosure is inadequate, the lessee is relieved from their duty to pay the "implicit finance charge", and - where it is understated in amount - the lessee is entitled to the benefit of the understated amount.
Of course, these 'implicit finance charge'-related remedies apply where the consumer (lessee) wishes to continue with the consumer agreement. Non-compliance with any CPA-required supplier (lessor) disclosure duties also entitle the lessee, on notice to the supplier, to consider the entire arrangement rescinded. This right, and it's related restitution duties, are explained in Ch.7, s.3 ["General Civil Remedies: General Rescission (Cancellation) Remedies"].
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