What if the equipment turns out to be leased, not owned?

Finding out that a key machine belongs to a lessor changes what you are buying. A seller can sell only what the seller owns, and a lease may carry a registered interest in favour of the lessor. This page uses Ontario’s statutes as its example, with Alberta and British Columbia for comparison. Other provinces and territories have their own personal property security regimes, so check yours.

What the seller can sell

Ontario’s Sale of Goods Act implies a condition that the seller has a right to sell the goods, unless the circumstances of the contract show a different intention. It also says that where goods are sold by a person who is not the owner and who does not sell them under the owner’s authority or with the owner’s consent, the buyer acquires no better title than the seller had, unless the owner is by conduct precluded from denying the seller’s authority to sell, and subject to the rest of the Act. So paying the seller for equipment the seller only leases does not, on its own, give you title to it.

Why a lease can be registered

Subject to section 4(1), Ontario’s Personal Property Security Act applies to a lease of goods for a term of more than one year, even though the lease may not secure payment or performance of an obligation, and the lessor’s interest is within its definition of a purchase-money security interest. The Act’s definition of a lease for a term of more than one year includes some shorter leases in the circumstances it sets out, and excludes others, such as a lease by a lessor who is not regularly engaged in the business of leasing goods. Alberta’s and British Columbia’s statutes use the same “lease for a term of more than one year” concept. A registry search can show a lessor’s registration before you close.

Options once you know

• Take over the lease: read its assignment clause and ask the lessor in writing whether it consents. See do contracts and leases transfer in an asset purchase.
• Buy the equipment out: ask the lessor for a payout figure and whether the price changes the deal.
• Replace it: price the replacement and the downtime into your offer.
• Walk away or renegotiate if the earnings you were shown depend on equipment that was never part of the sale.

Put it in the agreement

Ask for a schedule that separates owned equipment from leased equipment, a seller statement that it owns everything listed as owned, and the lessor’s consent as a closing condition for anything leased. Combine this with a lien search, as in which liens a registry search will miss.