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On June 6, 2024, Bill 200, the Homeowner Protection Act, 2024 (the "Act")1 received royal assent and came into force in Ontario amending, among other things, the Personal Property Security Act (the "PPSA") section 54 provisions governing the registration of notices of security interest ("NOSIs"). Financiers of consumer goods will no longer be able to register their PPSA security interests on title to the properties where such consumer goods are installed as fixtures. Existing NOSIs for consumer goods are now deemed to be expired and may be deleted from title upon application by the landowner.2
NOSIs had been a practical and cost-effective means to preserve and protect the priority of personal property security interests in consumer goods that are fixtures. Registration of a NOSI was deemed to put other persons dealing with the subject collateral on notice of the financier's security interest.3 In the face of a NOSI, property purchasers and prior mortgagees could therefore not take title or make subsequent advances in priority to the financier's interest.4 The result was that defaults would normally be cured upon a sale or refinancing of the property. This usually gave a fixture financier comfort enough to refrain from more drastic and disruptive actions for collection of the debt or enforcement of its security.
While financiers of consumer goods will still retain their security interests, they have now lost their most cost-effective means to enforce such security.5 Instead of being able to wait until sale or mortgage refinancing to be paid out, financiers will now have to commence legal proceedings on their debts, obtain judgments and register writs on title, placing the consumer in the same position but now liable under contract and/or or rules of the court for significant additional costs. The other remaining enforcement option is to enforce the security by seizure and sale pursuant to the PPSA, a wholly unattractive prospect for all parties where the collateral is, as in many cases, home HVAC equipment. Aside from the disruption enforcement would cause, the consumer would again be liable for significant additional costs under contract and the PPSA.
The inability to enforce passively through NOSIs will also lead many financiers to file consumer defaults with credit reporting agencies, where they would not have otherwise done so. These black marks will then remain on individuals' credit reports for seven years, even if all defaults are cured.
Although existing NOSIs are now expired, until such a NOSI is deleted from title to a property on application by the property owner, a purchaser or prior mortgagee of the property will still be deemed by the PPSA to be on notice of the financier's security interest (which exists independently of any NOSI).6 Even if the NOSI is deleted, its prior existence will remain on title as practical notice to any mortgagee or purchaser that a PPSA security interest may exist. The purchaser's ownership interest in the property and its fixtures would therefore not have priority over the financier's security interest and a prior mortgagee would not have priority for subsequent advances.7 A new mortgagee's interest would still be subordinate to that of the existing fixture financier regardless of NOSI status, provided the financier properly perfected its interest by registration pursuant to the PPSA before the new mortgage is registered on title.
While registration pursuant to the PPSA is, itself, intended to put the world on notice of a personal property security interest, there will, going forward, no doubt be great uncertainty caused by the absence of NOSIs easily discoverable by the standard title searches conducted by every purchaser and mortgagee. Given the coming into force of the Act, it should become best practice for a transactional lawyer, despite the added cost, to run a PPSA search to uncover any security interests in home equipment. Certainly a homeowner and its counsel cannot enter into transactions without disclosing a still-existing PPSA security interest.
The stated impetus for the Act was a supposedly widespread abuse of NOSIs registered in respect of predatory financing agreements, many of which were entered into through high-pressure door-to-door sales tactics.8 Door-to-door sales of home heating, air conditioners and water treatment equipment were banned in 2018 and the remaining resulting contracts represented no more than 1% of all NOSI registered interests. However, failure to expand the ban beyond these classes of equipment resulted in an increase of abuse of door-to-door sale and financing tactics for other kinds of home equipment.
Industry insiders regard abuse, in more recent years, to have been largely committed by one bad corporate actor, who has ceased operations and whose principal has left the country. Every example of abuse cited by the government in the legislature or elsewhere was committed by this entity. Part of this bad actor's modus operandi was to roll the security interests registered as NOSIs into collateral mortgages. The Act does nothing to assist victims of such mortgages and the NOSIs that the Act has deemed expired would not have led to payout to the bad actor in any case.9
The Act was tabled and passed quickly in response to media coverage of NOSI abuses, in reaction to a NDP private member's bill addressing the same mischief10 and, no doubt, in anticipation of the next election. The Minister in charge announced the pending legislation on March 5, 2024, the day the private member's bill had its first (and only) reading, and Bill 200 had its first reading on May 27, 2024, and had its second reading, went to committee, had its third reading and was passed all in the span of hours the following week.
The eradication of NOSIs, especially retroactively, caught the financing industry off guard. Consultations had been conducted in the fall of 2023, but those consultations never tabled the option of doing away with NOSIs altogether.11 Previously the Ontario Bar Association had prepared lengthy submissions, first in April 2023 and then as part of the consultations, which recommended strongly against doing away with NOSIs.12
The Act is likely to result in a reduction in the availability of financing for home fixtures and/or a significant increase in the cost of such financing to compensate for the additional uncertainty and expense of enforcement. This will impact almost every new home sale as well as government initiatives such as the federal Canada Greener Homes Initiative and the Ontario Home Efficiency Rebate Plus program.
Footnotes
1. Bill 200, Homeowner Protection Act, 2024.
2. Like any electronic title registration, the application for deletion of a NOSI will have to be done through a lawyer. See Director of Titles Bulletin 2024-07 – Homeowner Protection Act, 2023.
3. PPSA subsection 54(5).
4. PPSA section 34. A financing security interest would have to attach before the goods became a fixture in order to have priority over a prior mortgagee (unless the mortgagee consented to the security interest).
5. One troubling provision of the Act is the addition of new subsection 54(7)(b) to the PPSA which states that "the land described in the [NOSI. is not affected by any claim under the [NOSI.." If the term "land" is read to include fixtures to real property, the result would seem to be that the security interest in a fixture that is the subject of a NOSI no longer attaches to that fixture, thus erasing a financier's security altogether. The Act does not, however, amend section 34 of the PPSA, which governs the priority and enforcement of personal property security interests in fixtures, nor section 11, which governs the attachment of personal property security interests generally. A harmonious reading of the PPSA, as amended by the Act, would thus require the term "land" as used in new subsection 54(7)(b) to not include fixtures. That, however, leaves the meaning of new 54(7)(b) unclear.
6. Subsection 54(5) of the PPSA, which is not amended by the Act, deems every person dealing with the collateral subject to a registered NOSI to have knowledge of the underlying security interest in the collateral for purposes of subsection 34(2).
7. PPSA section 34.
8. Another increasing "abuse" not cited is the registration of NOSIs by installers of building materials, such as new roofs. Building materials are explicitly excluded from the PPSA definition of "personal property" and so they are not subject to the PPSA. A supplier and/or installer of building materials has the statutory lien under the Construction Act (Ontario) which is excluded from application of the PPSA (by subsection 4(1)(a) of the PPSA), but that lien requires perfection by commencement of legal proceedings, which proceedings have to be advanced in a timely manner. Building suppliers have therefore been attracted to the comparatively cheap cost and low maintenance of NOSIs.
9. The predatory terms of the underlying contracts are addressed by the earlier Bill 142, Better for Consumers, Better for Businesses Act, 2023, by which the Consumer Protection Act, 2023 was enacted. In the absence of regulations, the Consumer Protection Act, 2023 has not yet come into force, and so consumers remain bound to their underlying contracts even if their NOSIs are removed from title.
10. Bill 169, Removing Red Tape for Homeowners (No More Pushy, High-Pressure HVAC Scams) Act, 2024. This bill notably was not drafted to be explicitly retroactive, and thus would have had far less impact on existing NOSIs.
11. The Notice of Security Interest Consultation Paper, Fall 2023 even acknowledged, in its introduction:
Used properly, a NOSI is a legitimate tool that businesses can use to ensure their priority to remove their financed or leased equipment in certain circumstances. By registering a NOSI on the land registration system, a business effectively notifies a purchaser or mortgagee of the business' interest in the fixture and can avoid any surprises or disputes over interests in the fixtures on the property.
12. Ontario Bar Association: Consumer Protection Modernization: Notices of Security Interest, April 27, 2023; and Consultation on Issues Related to Notices of Security Interest (NOSIs), November 23, 2023.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.