Automobile and Equipment Lease in Ontario: What Happens When you can’t make the Lease Payment

Share this:

A large majority of Canadians lease an automobile or another equipment at some point in their lives. Yet, most of these people have no clear understanding of their rights and obligations in the event of a default – or when they are unable to make the lease payments. This lectures explains this specific issue in simple terms.

This lecture is taught by Amer Mushtaq, LL.B., M. Engineering , B.Sc. (Hons.), who is the Principal and Founder of Formative LLP.   Through his YouTube channel, YouCounsel, Amer shares practical advice from his years of legal experience to help anyone access justice and achieve their goals.  Subscribe today to learn more.


Show Notes:


Lecture Slides:

Welcome everyone.  This is Amer Mushtaq from YouCounsel.

A lot of people in Ontario and elsewhere in Canada lease automobiles or other equipment for their use.  At some point you may have leased a car or someone you know may have leased a car but the majority of people do not know or understand what happens when they are unable to make their lease payment.  We will cover this specific topic in today’s lecture so you can better understand what happens when a default or nonpayment of the lease occurs for any kind of equipment or automobile lease—we are not talking about residential leases.  We’re talking about automobile leases or equipment leases and equipment lease would include anything like a printer or TV or refrigerator or a car or airplane—any kind of equipment.  All these equipment leases are quite similar in terms of their basic structure and what happens when there is a default that occurs?  We will begin with our usual disclaimer that this course is not legal advice.  If you have any specific questions you should contact a lawyer or a paralegal or contact the Law Society of Ontario for a referral.

Now, what is a lease?  A lease is a contract. And it is a contract for renting a certain item for a specific time period.  The main thing you want to understand is that the lessee, i.e., the person who is renting does not have ownership of the item.  They are renting.  They can rent for instance a car for a day or for a week or for a month or for 5 years it is still a rent/a lease.  The time period is defined in the lease agreement—whether it’s for a day or for 5 years and then the lessee does not have the ownership of that item.  In some cases you may have the option to purchase that item at the end of the lease and that’s how the lease gets complicated.  Fundamentally, a lease is no different than anything that you take on rent.  As I said the leases get complicated. 

There are basically 2 types of leases.  The 1st one is called a True Lease.  True Lease is generally when the lease term ends and you return the item.  For instance, when you rent a car for a day or for a week—at the end of that day / at the end of that week, you actually go and return that car.  That’s an example of a True Lease—you paid the rent and then you returned the rental item back. What happens on a True Lease is that in case of any legal issues the common law principles of contract apply.  We’ll talk briefly about what those principles are and they’re important to keep in mind.  The 2nd kind of lease is called the Finance Lease.  A finance lease is really more like a security agreement for that item.  In other words the leasing company or the automobile company that’s leasing that item really do not want that item back.  That’s the way the lease is structured.  Essentially, they are financing that lease for you.  In finance leasing the lessee has a right to purchase at the end of the lease term.  That’s a general clause in that finance lease.  In finance lease, there is in Ontario an Act called Personal Property and Security Act that applies in addition to common law principles of contract.  It’s important because this particular Act provides additional rights and obligations on both parties.  It is important to consider this Act when there is a default—what are the options available to both parties?  The legal distinction between the True Lease and Finance Lease for the purposes of law is important.  The court when it’s deciding whether a True Lease or Finance Lease will review a number of factors in that lease agreement and then decide whether it’s a True Lease or not and then apply the legal principles accordingly.  It’s an important distinction legally and so you should understand whether you’re entering a True Lease or Finance Lease.

We’re talking about Default.  Default occurs in one of the instances when the lessee cannot make a payment, e.g., if you have rented that equipment and you are unable to make a payment.  In that situation it is termed as a default of the lease agreement.  What happens in that situation?  If a default has occurred the lessor or the leasing company is entitled to common law damages.  As we said—the usual principles of contract law would apply.  What is that basic principle?  The basic principle is that if the default has occurred and the lessee is unable to make a rental payment/lease payment, then the court will “put the plaintiff (that is the leasing company) in a position where he would have been in had the defendant (which is you—the lessee) fully performed his contractual obligations”.  What that means is if you have a lease of 5 years term and you are in default after one year, then the court is going to put the plaintiff at the end of 5 years—that means if you had made all your 5 year payments how much money would the plaintiff have received from you.  That’s the position—that is the future position.  The plaintiff will be put in that future position and that means the damages against you will be the amount of the balance payments that you have not made.  That’s the basic common law principle for damages.  But there are 2 qualifications to it which are important.  Common law damages are subject to the principles of mitigation and remoteness.  We will talk about mitigation today.  We will not talk about remoteness today.  Mitigation is an important principle to keep in mind in common law damages.  What mitigation essentially means is that whatever are these damages that put the plaintiff in that future position, whatever those damages are the lessor / the plaintiff / the leasing company has an obligation to reduce those damages or to help you reduce those damages.  That’s called the principle of mitigation.  Common Law damages are then whatever the damages are or whatever that future amount of damages is minus whatever the mitigation efforts that the lessor has made to reduce your damages.

Let’s explain that by way of an example that will probably make you understand it better.  You lease a car for $500.00 per month for 60 months.  In other words you’ll be paying $30,000.00 over the course of 60 months.  You make 10 payments and then you are unable to make further payments.  A default occurs at a 10 month period.   50 months is outstanding—pretty straightforward.  The damages are 50 times $500.00 is $25000.00 less mitigation.  This is the damages under common law principle.  This is the future position as if you have paid all of the money for 60 months—the lessor would have received $25,000.00 plus $5000.00 that you have already paid that’s $30000.00.  Now that the default has occurred damages are $25000.00 less mitigation.  Mitigation is that this lessor will now take back your vehicle and then try to find another lessee and rent that vehicle to that person.  In this situation let’s say that the mitigation occurs after 10 months.  The lessor is able to lease to someone else for the same payments ($500.00 a month) after 10 months.  For 10 months you pay the money, then you are in default and the lessor took it back from you and made efforts to lease it to someone else.  It took the lessor 10 months to lease it to someone else for the same $500.00 per month.  What are the damages? The total damages were 50 months in the beginning because you had paid for 10 and then 50 were outstanding.  Then they received the money for 40 months from someone else.  The damages, now, are 10 months which equals $5000.00.  This is the $25,000.00—which was the initial damages—now reduced to $5000.00.  The principle of mitigation as you can see is very helpful for the lessee because the damages can be reduced if the lessor is able to recoup its losses from someone else.  The lessor has to make these efforts to try to mitigate those damages.  What happens if the lessor does not want the responsibility of mitigating its damages?  This is an added obligation—you agreed to pay for 60 months now you’re unable to pay after 10 months.  The lessor has to take over this responsibility of taking the vehicle back finding other customers and then try to re-lease the vehicle or the equipment.  The lessor doesn’t want that responsibility—is there a way to get around this obligation of mitigation?  The answer is yes.

And it’s called liquidated damages.  The Lessor can have a clause in the lease agreement which is “a liquidated damages clause” and which allows the lessor not to mitigate the damages.  If you have a liquidated damages clause in your lease agreement the lessor may not have the obligation to mitigate its damages.  What is this liquidated damages clause?  (a) “Liquidated damages” is a genuine pre-estimate of the damages.  The court says that it must not be an amount which is excessive or unconscionable—it has to be a genuine pre-estimate.  (b) In our example, the pre-estimate really is $25,000 because that’s the amount of money that’s outstanding, less some discount for the immediate payment—that is being made to him immediately.  For example, the lease agreements would indicate about a 3% per annum discount on this to justify that it’s a genuine pre-estimate and not a penalty.  (c) In our example, if there is a clause like that (and I’ll show you an example of such a clause and it’s very common) the lessor puts a clause for liquidated damages—the obligation to mitigate then shifts onto the lessee in a way.  The lessor doesn’t have to take the car back and go find another lessee so that your damages could be reduced.  The obligation now is on you.  You can go, and if the lease agreement permits, find another person who can take over your lease, so that you can get out of the lease and not incur those damages.  Someone else can pay to the lessor.  Hence you notice these websites like or other lease websites, where lessees who believe that they are unable to make payments or they do not wish to continue with their lease agreement, go and look for someone else. 

An example, when you go on, you can find these amazing deals.  For instance, if someone wants to get out of a lease worth $25,000.00 (outstanding payment) and if you can help them out there you may be able to take over that lease for $20,000.00.  That person may pay $5000.00 so that you get the advantage of a cheaper lease and they don’t have to pay $25,000.  That’s the concept behind all these websites.  The obligation is shifted on the lessee.  The lessor doesn’t have to go around looking for another lessee.  The liquidated damages clause—when you look at your lease agreement there will be a clause called Remedies clause and in that Remedies clause all of the liquidated damages stuff is there.  A lot of people will not even read it.  They may not even recognize and may not even understand what that clause says.  I’m going to give you an example of a similar clause and you’ll see how complicated this may sound:

Upon a default (which is one of the example is when you’re unable to make payment) Lessor (leasing company) may: (a) terminate this lease; (b) declare the Stipulated Loss Value immediately due (and we’ll talk about what that stipulated loss value is), as liquidated damages and not as a penalty (it cannot be unconscionable or excessive); and (c) peacefully repossess the equipment without court order or without liability for entry or damage to property or require the Lessee to return the equipment to the LessorThe foregoing remedies available to the Lessor are cumulative and are in addition to all other rights or remedies now or hereafter existing under this lease or at law or in equity and maybe enforced concurrently and from time to time.  Where Lessee is in default and the Lessor exercises its rights in accordance with this Clause, Lessee must pay the Lessor’s costs of collection, repossession of the Equipment and enforcement rights including legal costs…”  

It’s a pretty extensive clause.  You will notice in lease agreements the clauses are very similar and these are very, very carefully drafted by lawyers.  You will have great difficulty in going around these clauses if you are in that situation.

Let’s talk about Stipulated Loss Value and how it is defined.  “Stipulated Lost Value is, as of the date for which it is being determined; (if your breach occurs as of today) the Rental Payments and other amounts then due (whatever is due); plus the present value of all Rental Payments scheduled to become due for the rest of the Term (that’s 15 months for our example above) discounted from their due dates at 3% per annum (so some discount); plus the present value of the amount that Lessee is obliged to pay or that it may optionally pay to acquire all of the Equipment at the end of the Term, if this Lease expressly gives Lessee the obligation or option to do so…” so on and so forth.  It is very, very restrictive very, very solid clauses that you need to face.

What are the lessons you take from this lecture—that if you are in a situation where you’re leasing some equipment or car and chances are you will, then 1st of all you must carefully review and understand the lease agreement and especially the remedies clause.  2nd, then understand clearly your rights and obligations in the event of a default.  You don’t want to be in a situation where the default has occurred and now you are looking at your lease agreement and you realize that the default clause and the clause for remedy is so strict and so harsh that you have no option and you are unable to negotiate anything with the Lessor.   A lot of people are optimistic when they are leasing any equipment (or vehicle).  They believe that they will be able to make those payments but there are all the circumstances when you are unable to fulfill your obligations.  The only way to challenge (as you may have figured out) a liquidated damages clause is by showing that the clause is a form of penalty rate which is unconscionable—it is excessive.  This is a separate topic and we will cover it in a separate lecture. 

Hopefully, this lecture gives you a sense of understanding better your lease agreement with respect to a default.  Hopefully, when you lease a vehicle next time or any other equipment, you have a better understanding and you are able to negotiate a better deal.

I thank you for watching and we look forward to seeing you in the next lecture.

Share this:

Comments are closed.