Leasing Agreements in Quebec: True Lease or Financing Lease in the Context of an Insolvency?

One of the main advantages for a debtor to seek protection under the Companies’ Creditors Arrangement Act (CCAA) or the Bankruptcy and Insolvency Act (BIA) is the stay of proceedings that prevents creditors faced with a default in payment from taking any action against the debtor. This allows the debtor, among other things, to reorganize itself or dispose of some or all of its assets under the court’s supervision. Be that as it may, there are exceptions.

Pursuant to sections 11.01(a) of the CCAA and 65.1(4) of the BIA, a lessor may require immediate payment for the use of leased property by a debtor. However, this exception only applies where the contract is a true lease, i.e., a contract where the paid consideration is for the use (and not the acquisition) of the property. In such a case, the debtor must pay for the property it uses as part of its restructuring, just as it would have to pay a service provider for services rendered in the same context. Conversely, where the contract is a financing or security lease (i.e., a contract for which the consideration paid is intended for the acquisition of the property), the stay of proceedings will continue to apply to avoid placing one creditor in a more beneficial position than other creditors.

In Quebec, this analysis takes on a completely different dimension. The Civil Code of Québec (CCQ) provides for various nominated contracts allowing the debtor to enjoy property in exchange for monthly payments, namely:

• A lease (louage or bail), i.e., a contract by which a lessor (locateur) undertakes to provide a lessee (locataire) with the enjoyment of a property in return for rent.
• Leasing (crédit-bail), i.e., a contract by which a lessor (crédit-bailleur) acquires property from a vendor at the request of a lessee (crédit-preneur) and puts such property at the lessee’s disposal in return for payment.
• An instalment sale contract, by which a vendor reserves ownership of a property until it receives full payment of the sale price from the buyer.

The above qualification of contracts provided under the CCQ will, however, have no bearing on a court having jurisdiction over CCAA or BIA proceedings in a given matter. Instead, the Court will seek to determine whether a contract is a true lease or a financing lease. Such an analysis will be particularly relevant in the case of a leasing agreement (crédit-bail), whose hybrid characteristics may sometimes complicate the determination of its nature under the Canadian insolvency regime, unlike a lease (bail) and an instalment sale contract, which are by nature, respectively, a lease agreement and a financing instrument serving the acquisition of property.

The Court may be inclined to conclude that a leasing agreement (crédit-bail) constitutes a true lease (which would not be subject to a stay of proceedings) in light of the criteria established in Canadian jurisprudence, including:

• Use of the property: The possession or occupancy of the property by the lessee (crédit-preneur) and the impossibility for the lessor (crédit-bailleur) to rent the property to another party.
• Intention of the parties: The possibility for the lessor (crédit-bailleur) to require the restitution of the property in case of a default in payment by the lessee (crédit-preneur).
• Commercial activities of the lessor: The commercial activities and specialization of the lessor (crédit-bailleur) in renting property.
• Consideration for the payments: The fact that the payments made by the lessee (crédit-preneur) are for the use of the property with the option of returning said property to its true owner, namely the lessor (crédit-bailleur), at the end of a given term.
• Buyback option: The existence of a buyback option, allowing for the lessor to purchase the property back at the end of a given term at fair market value.
• Absence of interest: The absence of interest payable with each payment.

Depending on the circumstances of each case, some or all of these criteria will typically be considered by the Court to determine whether a leasing agreement is a financing or a true lease for the purposes of sections 11.01(a) of the CCAA and 65.1(4) of the BIA. This determination will be based on an analysis of the above jurisprudential factors reflecting the parties’ true intention as to the nature of the contract in an insolvency context.