When a commercial lease is entered into, all parties to the contract are advised to carefully review the language before signing it to ensure that all relevant laws and legislation clearly and unambiguously articulate all provisions. Failure to do so may lead to a lawsuit that could be costly in terms of time and money for both parties. 

When a business dispute leads to litigation for breach of contract, the court will consider the express terms of the contract in question, alongside any relevant legislation, in evaluating who breached what terms of the contract and what kind of remedy will resolve the breach. Importantly, a contract drafted so that it violates applicable laws will be considered unenforceable.

Two Parties Enter into a Commercial Lease

Pyke v Merchant Growth Asset Financing involved the appellant “DP,” a logger and truck driver who, in 2018, sought to lease a new logging truck. DP’s sister, “IP,” was also an appellant who assisted in financing the lease. In October 2018, the parties entered a commercial Lease Agreement with Merchant Growth Asset Financing Ltd. (the “appellant”) regarding a logging truck. 

When the parties entered the Commercial Lease, they simultaneously agreed to secure the lease (the “Security Agreement”). The Security Agreement purported to engage the Merchant and only DP (IP’s name was not included in the agreement), and it “pledged certain personal property to secure their obligations under the Lease Agreement.” The items listed as collateral in the Security Agreement included a modular home, a motorcycle and a logging trailer. 

Breach of Lease Leads to Significant Damages for Lessor

In February 2019, the appellants ceased making any payments under the Lease Agreement, which prompted the respondent to send them a demand letter in May 2019, to which they did not respond. Given the lack of response, the respondent moved forward in June of 2019 with repossession of the logging truck and, three days later, requested that DP surrender his motorcycle to them, which he did. According to the court, “the other items of collateral had negligible value. The logging trailer was apparently damaged, and the modular home appears to have had limited, if any, market value.” 

In January 2020, the respondent sold the logging truck for just over $31,000. It commenced a claim for arrears owed under the Lease Agreement and liquidated damages for the loss of prospective lease revenue. The respondent sought to recover the “net present value of the unpaid lease payments at the time of trial, after deducting the amount received on the sale of the truck”; this amounted to $230,217.04. At the trial, the respondent continued to hold the motorcycle as collateral.

The Legal Principles and Application of the PPSA

The court noted that section 67 of the Personal Property Security Act, known as the “seize or sue” provision, applies only to “consumer goods.” The provision dictates that if a person defaults under a security agreement that provides for a security interest in consumer goods, then the secured party may take one of the following four actions:

  1. exercise their right to seize collateral in accordance with section 58 of the PPSA
  2. proceed with a voluntary foreclosure against collateral in accordance with section 61 of the PPSA
  3. accept surrender of the goods named in the agreement by the debtor
  4. bring an action to recover judgment

Subsection (2) of section 67 further dictates that if the party to whom the outstanding debt is owed decides to proceed under any of options 1, 2 or 3, then any of “the debtor’s unperformed obligations under” either a security agreement or any related agreement, are extinguished. In other words, if the person who is owed money decides to either seize collateral, voluntarily foreclose against collateral or accept surrender of goods named as security in a security agreement. The debt owed will be considered resolved and the debtor will have no further obligation to the creditor. 

Importantly, section 67 is noted to apply to “consumer goods”, which are defined under the act as “goods that are used or acquired for use primarily for personal, family or household purposes”. 

Furthermore, section 56(3) of the PPSA states that “… no provision of sections … 58 to 69, to the extent that it gives rights to the debtor or imposes obligations on the secured party, can be waived or varied by agreement or otherwise”. This means that the delineated sections, including section 67, cannot be avoided or amended in any way and must be complied with in all circumstances.

Application of the Legal Principles to the Facts of This Case – Decision of the Lower Court

At the initial trial of this matter, the appellants took the position that the respondent was precluded from bringing an action to recover payment for outstanding amounts owed under the Lease Agreement because it had already accepted DP’s motorcycle as collateral (i.e., the respondent had proceeded under option number 1, as indicated above). As such, they contended that the action was prevented from proceeding under the Personal Property Security Act.

The court noted that the Security Agreement repeatedly used “collateral” to reference “the property that serves as security for the debt.”  DP testified that he had purchased the motorcycle for personal use as a stress relief activity. Although he had been unable to use his motorcycle as much as he would have liked (before its possession by the respondent as collateral), DP’s intention had always been to use it for personal use.

The trial judge determined that the question was, “is the Security Agreement an agreement that provides for a security interest in consumer goods?” To that end, the judge noted that the Security Agreement defined “goods” under how that term is defined under the PPSA, “provided always that the term ‘goods’ shall never include ‘consumer goods’ of the Debtor as that term is defined in the PPSA”; as such, the term “goods” had been defined under the Lease Agreement to exclude consumer goods expressly.

The lower court found that the appellants were obligated, under the Security Agreement, “to provide Collateral that was not consumer goods so that the respondent was not restricted in its remedies in case of default.” The trial judge was ultimately satisfied that it would be unfair to the respondent to conclude that the motorcycle constituted a consumer good such that further recovery of the debt owed by the appellants was precluded by their acceptance of same as collateral in accordance with section 67 of the PPSA. The court found that “the statutory scheme would be undermined if, after default, a debtor was permitted to change the description of collateral in a security agreement that is not, on its express terms, an agreement that provides for a security interest in consumer goods.” 

Initial Decision Overturned on Appeal

The appellate judge disagreed entirely with the trial judge’s analysis of this case, largely because section 56(3) of the PPSA, as noted above, “specifically states that parties cannot contract out of the provisions of s. 67 … Section 56(3) does not allow parties to contract for remedies prohibited by statute. They cannot, with a nudge and a wink, use contractual language to state that consumer goods are other than consumer goods”. In other words, it is the debtor who is tasked with defining any property deemed as collateral as either a “consumer good” or “equipment.” If a debtor defines its property as equipment and then later determines that this categorization is to its detriment, the debtor is effectively “stuck with its representation,” and will not be allowed to introduce or rely upon any evidence that contradicts its initial assertion. In this case, the appellants had never represented anything other than that the motorcycle constituted a consumer good.

Moreover, the appellate judge noted that the “primary goal of the PPSA is to provide commercial certainty and predictability” and that provisions such as clause 67 exist to provide a “consumer-protection function” that “cannot be judicially excised from the statute” and instead must be “construed as being remedial, and must be given such fair, large and liberal construction and interpretation as best ensures the attainment of its objects.” As such, the appellate judge rejected the decision of the lower court judge with respect to the respondent having been placed in an untenable position. As stated by the court, the respondent was “fully entitled to demand clear representations” by the appellants at the time the parties entered into the Lease and Security Agreements. As such, the respondent requested that DP sign a collateral list that specifically indicated, “I certify that the following items of collateral are not goods used or acquired primarily for personal, family or household purposes.” The respondent would have found himself in a strong position. However, the respondent had not asked DP to sign any such statement, which weakened its position because it had “made no efforts to determine the facts before agreeing and did not take steps to remedy the situation when it seized the motorcycle. Its position is further weakened by the fact that the property in issue in this case – a Harley Fatboy Motorcycle – is more commonly seen as a ‘consumer good’ than as ‘equipment’” and clearly did not constitute “inventory.” 

As a result, the court was satisfied that it is not “unfair to a lender to expect it to take steps, before taking security, to ascertain the nature of that security. A debtor cannot unilaterally change the categorization of an asset at the time of default”, particularly as section 1(4) of the PPSA dictates that “in the absence of a more specific statutory provision, the determination of whether a piece of property is a consumer good is determined at the time the security interest attaches.” The court thus allowed the appeal, declared the motorcycle to be a consumer good and stated that its seizure by the respondent precluded the respondent, under section 67, from pursuing any further legal action to recover damages. The respondent’s claim was therefore dismissed.

Contact Meridian Law Group Today for Your Commercial Litigation Needs

If you are involved in commercial litigation of any kind, whether related to a business dispute, a real estate transaction gone awry, a disagreement with respect to construction, or insurance litigation, you are in need of knowledgeable legal assistance. Fortunately, the commercial litigation team at Meridian Law Group are here to help. From our offices in downtown Vancouver, British Columbia, Meridian Law Group is proud to provide British Columbians from all over the province with competent, capable, savvy assistance for their commercial litigation matters. 

Contact Meridian Law Group today, either online or by telephone, at (604) 687-2277 to schedule a confidential consultation. One of our friendly, knowledgeable staff will be pleased to listen to your concerns and help you to plan a strategy for how best to advance and protect your interests.