Q: On a new financing, do we really need to obtain an Ontario PPSA7 acknowledgment or estoppel letter from a motor vehicle lessor with a prior registration filed against our corporate borrower? Our borrower says it is clear that the prior registration is a motor vehicle lease, and it does not want to have to chase it down before closing.

A: Like applying sunscreen, obtaining PPSA estoppel letters or acknowledgments for motor vehicle lease registrations can seem tedious at times.  However, a lender could possibly get burned if it fails to do so. 

The problem stems from Ontario’s “check the box” registration system for recording the classes of collateral which are subject to a security interest, and the ability of a secured party to shelter or perfect more than one security agreement under a single registration.

Out of an abundance of caution, motor vehicle lessors will typically check the boxes for “equipment”, “motor vehicle” and “other” when registering to perfect a security interest in a motor vehicle.  They will also record the make and model particulars of the motor vehicle and its VIN in lines 11 and 12 of the financing statement.  However, they do not normally also include a general collateral description in lines 13 - 15 of the financing statement (a “GCD”).

Under Section 46(2.1) of the Ontario PPSA, where a financing statement sets out a classification of collateral and also contains words that appear to limit the scope of the classification, then the secured party may only claim a security interest in the class as limited. Although including a GCD in a financing statement will trigger Section 46(2.1) to limit the scope of the collateral, merely completing the motor vehicle descriptions in lines 11 and 12 will not do so.  In addition, some cases have suggested that including a GCD only limits specific classifications like “accounts”, “inventory” and “equipment”, and does not limit the “other” classification.

What this means is that if an Ontario PPSA acknowledgment is not obtained, a motor vehicle lessor could possibly use its registration as described above to perfect a security interest in other equipment of the borrower and not just the motor vehicles listed in lines 11 and 12.  Some motor vehicle lessors are larger organizations that may also offer general equipment financing to their lessees.  So the potential is there for other security agreements covering general equipment assets to be sheltered by the single registration made by the motor vehicle lessor.  Obtaining a proper form of acknowledgment from the motor vehicle lessor will serve to limit the scope of the lessor’s security interest to the specific vehicles listed.

It is true that some lenders assess the risk of a specific motor vehicle lessor providing general equipment financing to their borrower to be remote in many cases, and therefore choose not to seek an acknowledgment.  However, obtaining an acknowledgment is a relatively quick and inexpensive way to eliminate this risk of getting burned.  Despite what your borrower may suggest, most motor vehicle lessors are well equipped with staff to issue the Ontario PPSA acknowledgment letters promptly upon request.