News & Views

The Priority Interest that has you “Jumping the Queue”
October 03, 2019

The Priority Interest that has you “Jumping the Queue”

Written by Leslie Fluxgold & Stephanie Furlan 

A purchase money security interest (“PMSI”) is perhaps one of the most important exceptions to the “first to register” rule under the Ontario Personal Property Security Act (“PPSA”). It allows a secured party to obtain a first-ranking security interest in a subset of collateral. As per subsection 1(1) of the PPSA, a PMSI is defined as “a security interest taken or reserved in collateral, other than investment property, to secure payment of all or part of its price” or “a security interest taken by a person who gives value for the purpose of enabling the debtor to acquire rights in or to the collateral, to the extent that the value is applied to acquire the rights.” As long as the requirements in section 33 of the PPSA are met, the PMSI will supersede a prior registered security interest in the same collateral.

Obtaining a PMSI in Inventory Collateral (Subsection 33(1) of the PPSA)

Inventory can be defined as goods held for sale or lease by the debtor. To obtain a PMSI in inventory, it is important that the secured party meets the following three requirements before the debtor, or a third party on behalf of the debtor, obtains possession of the collateral:

  1. Execute the security agreement;
  2. Register the financing statement; and
  3. Send notice in writing to every other secured party who has registered a financing statement for the same class of collateral, before the registration date of the PMSI. In this notice, it is important to provide a brief description of the inventory by item or type and state that you have or expect to acquire a PMSI in such inventory.

Tip: Retain proof establishing when the debtor obtained possession of the collateral, such as a receipt of delivery or shipment via written, dated acknowledgement.

Obtaining a PMSI in Non-Inventory Collateral (Subsection 33(2) of the PPSA)

PMSIs differ between inventory and non-inventory collateral. To obtain a PMSI in non-inventory, the secured party must meet the following three requirements:

  1. Execute the security agreement;
  2. Register the financing statement; and
  3. Complete the above two requirements within 15 days. With tangible collateral, such as goods or equipment, this 15-day period begins from its delivery. Delivery can be specified as when the debtor receives possession of the collateral. In the case of intangible collateral, this 15-day period begins from attachment, not delivery. Attachment occurs when value is given, the debtor acquires rights in the collateral and the security agreement is executed.

The third requirement is the main difference between inventory and non-inventory collateral. With inventory, the PMSI is perfected at the time the debtor receives possession of the collateral, in other words, the secured party must meet the requirements before the debtor acquires possession of the collateral. As it relates to the transportation of goods, the debtor would be deemed to have possession of the collateral the moment that it hires a shipping company to transport the collateral. Whereas with non-inventory, there is a 15-day grace period that applies.

Please note that under subsection 33(3) of the PPSA, a seller’s PMSI has priority over a non-seller’s PMSI in the same collateral.

Impact on Section 427 Security Under the Bank Act of Canada (the “Bank Act”)

The above rules apply only to other PPSA creditors. Thus, in the instance of a security interest pursuant to section 427 of the Bank Act, it is important to remember that the PPSA rules of priority would not apply. If a search discovers a security interest under the Bank Act, the best course of action is to obtain from the bank an acknowledgement of priority.

If you have any questions regarding the matter, please do not hesitate to contact Leslie Fluxgold directly at [email protected] or at 905 763 3770 x 210. 

*The material provided in this article is for general information purposes only. It is not intended to provide legal advice or opinions of any kind.

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*Reference: Personal Property Security Act, R.S.O. 1990


About the Author:

Leslie A. Fluxgold is a respected advisor to the business community, with a focus on commercial real estate and commercial lending. Les has the expertise and hands-on experience to guide clients through complicated real estate matters and commercial loan transactions. 

Stephanie Furlan is the 2019-2020 articling student at FIJ. She first joined the firm as a summer student in 2018. Stephanie is a recent graduate of the University of Windsor Faculty of Law and University of Detroit Mercy School of Law Dual J.D. Program.

Mortgagees vs. Tenants: S. 52 Applications and Setting Aside Sweetheart Deals
September 24, 2019

Mortgagees vs. Tenants: S. 52 Applications and Setting Aside Sweetheart Deals

Written by Liliana Ferreira

Privity of contract is a common law principle which provides that only the parties to a contract are bound by that contract. When applied to a mortgage contract, it means that only the mortgagor(s) (the borrower) and the mortgagee (the lender) are bound by the terms and conditions of the mortgage. These terms and conditions, usually referred to as Standard Charge Terms, contain default provisions which allow the mortgagee to take possession of the mortgaged property upon an event of default (provided the appropriate enforcement steps have been taken). While the mortgagor is clearly bound by the Standard Charge Terms, and therefore obligated to give up possession of the property, it becomes a little less clear when there are other occupants, especially where those occupants may be classified as “tenants” under the Residential Tenancies Act (the “RTA”).

Under the RTA, tenants are afforded extensive protections and rights, particularly with regards to when a tenancy can be terminated. These rights and protections were recently expanded, and while a complete discussion of the changes is beyond the scope of this article, one of the circumstances in which a tenancy can be terminated is if the landlord or future owner, or their immediate family, wants to reside in the property.

However, a landlord or owner can only rely on this ground for termination if the tenant does not have a fixed term lease. If the tenant has a fixed term tenancy, for example a two-year lease, a landlord or owner cannot terminate the lease for their own use until the end of the current lease term. The tenant will have the right to remain in the property for at least a period of two years (following which their lease automatically becomes a month-to-month tenancy).

This has practical implications for a mortgagee seeking to sell the property under power of sale. If the property is tenanted, the tenants have the legal right to remain in the property until the end of the current term of their lease. If a mortgagor believes they are at risk of losing their home, they may be tempted to enter into a lease agreement as a strategy to delay or dissuade a mortgagee from proceeding with a sale under a power of sale. If a mortgagee proceeds with a power of sale they automatically step in as the new landlord and, thus, inherit all the obligations and responsibilities of same. This can be particularly onerous on a mortgagee as selling a tenanted property can sometimes be very difficult, particularly where the rent is below market rent or the term of the tenancy is for a lengthy period.

And so, what options are available to a mortgagee that needs to proceed with mortgage enforcement proceedings where the property is tenanted?

Enter s. 52 of the Mortgages Act. Section 52 can be a useful tool for mortgagees where a mortgagor appears to have entered into a ‘sweetheart deal’ for the purposes of hindering or frustrating enforcement efforts. Pursuant to section 52 of the Mortgages Act, the Court may vary or set aside a tenancy agreement where it appears to have been entered into by the mortgage in contemplation of, or after default of, the mortgage with the object of discouraging the mortgagee from taking possession of the property, or adversely affecting the value of the mortgagees interests in the property. In assessing whether or not to set aside a tenancy agreement under section 52 of the Mortgages Act, the Courts consider whether or not the tenancy agreement constitutes a “sweetheart deal or scheme”, to be inherited by the mortgagee in possession. Key factors considered to be indicators of a “sweetheart deal or scheme” include a below fair market rent, and the proximity of the formation of the tenancy agreement to the mortgagor’s default on the mortgage.

To determine whether the tenancy agreement could qualify as a sweetheart deal, the mortgagee can, pursuant to section 50(2) of the Mortgages Act request a copy of any written tenancy agreement from the tenant or the mortgagor, or the particulars of the tenancy agreement where there is no written agreement. If either the mortgagor or the tenant fail to comply, the mortgagee may apply to the Court for an order demanding compliance or, failing same, the mortgagee can apply for an order from the Landlord and Tenant Board to terminate the tenancy on the basis that failure to provide particulars is a form of interference with the mortgagee’s lawful right, privilege or interest (s. 64 of the RTA).

While a section 52 application is not the only remedy available to mortgagees where a mortgagor has defaulted on a mortgage and the secured property is tenanted, it can be an efficient tool to tip the balance of the scales in favour of the mortgagee.

If you have any questions regarding land transfer tax or need assistance with the sale, purchase or refinancing of your property do not hesitate to contact Liliana Ferreira directly at [email protected] or at 905 763 3770 x 242. 

*The material provided in this article is for general information purposes only. It is not intended to provide legal advice or opinions of any kind.


About the Author:

Liliana Ferreira's practice encompasses commercial and estate litigation. She advises individual and corporate clients on a range of legal issues such as employment and contract disputes, construction matters and debt recovery claims.