Leasing a Car (No. 196)

This information applies to British Columbia, Canada. Last reviewed for legal accuracy by Ian Christman, Vehicle Sales Authority of BC in February 2019.

Leasing a vehicle is quite different from buying one. Leasing can offer lower monthly payments, but you typically spend more in the long run. Learn your rights if you lease.

Understand your legal rights

How leasing differs from buying

A lease is an agreement to rent and use someone else’s property, in this case, a vehicle. A lease can last from several months to several years. At the start of a lease, you make a first (initial) payment. You may also have to pay a security deposit. After that, you make monthly payments.

Leasing is an alternative to buying — both have advantages and disadvantages. If you lease, you don’t own the vehicle. And you have different rights and responsibilities than if you buy.

Advantages of leasing

On the surface, leasing can be more appealing than buying. You typically get a newer vehicle. Your monthly lease payments can be much lower than the monthly payments on a car loan. Taxes may be lower because they are based on monthly payments (as opposed to the purchase price).

Many find they can afford a more expensive vehicle, or one with more options, if they lease.

Disadvantages of leasing

But there are disadvantages to leasing a vehicle.

One is the dealer owns the vehicle, not you. This means the dealer may place restrictions on who may drive it. You may also have to follow — and pay for — a set maintenance schedule.

And at the end of the lease, you haven’t built up equity in the vehicle the way you would have if you had bought. At the end of paying off a car loan, you own the vehicle. At the end of a lease, you own nothing.

The result is that leasing typically costs you more than borrowing money to buy a vehicle. For more on buying a vehicle, see our information on buying a used car (no. 197).

Types of vehicle leases

There are two types of vehicle lease.

First, a straight lease. With this, you return the vehicle when the lease ends and owe nothing more. This is rarely used.

Second, a lease with an option to purchase. This comes in two forms — open and closed. In a closed lease with an option to purchase, you pay an agreed-on amount if you decide to buy the vehicle at the end of the lease.

In an open lease with an option to purchase, you may have to pay an extra amount at the end of the lease. How much more you have to pay is explained in the lease agreement. At the beginning of the lease, a dealer estimates what a vehicle will be worth at the end of the lease (the residual value) and then calculates the monthly payments based on that estimate. If the vehicle is worth less at the end of the lease, you have to pay more to make up the difference. You may also have to pay extra if you drove more than the lease allowed or if the vehicle has more than normal wear.

What the lease must tell you

A lease agreement is a legally binding contract. Make sure you understand it before you sign it. Under the law in BC, the lease agreement must include:

• a summary of costs and credits for any extended warranty
• all express warranties and guarantees made by the manufacturer or dealer
• who is responsible for maintaining and servicing the vehicle
• a description of any insurance, including types and amounts of coverage, that you must provide and pay for
• any limit on your use and enjoyment of the vehicle, including any restriction on who can drive it and any requirement for permission to take the vehicle outside of BC
• the amount of tax in each periodic payment you must make under the agreement
• the cooling-off period (described below)

The dealer must give you a disclosure statement

As well, another law in BC requires the dealer to give you a disclosure statement before you sign the lease. Read it carefully. It has all the key terms and details of the lease.

The dealer must tell you if there is a lien on the vehicle

Another BC law requires a person leasing goods to tell you if there is any lien or charge on the goods in favour of a third party. A lien is a legal claim made on property — such as a vehicle — to make sure someone pays a debt. Liens are attached to a vehicle, not to its owner. If you lease a vehicle with a lien on it, the lien holder can take the vehicle from you as payment for the debt.

You can change your mind during the cooling-off period

You get one business day after you sign the lease to cancel it — this is the cooling-off period. During this time, the law requires the vehicle to stay with the leasing company. If you change your mind in that time, you can cancel the lease and get your money back without penalty. While you have the whole day to cancel, it’s better to tell the dealer during business hours in writing.

Some days do not count in the cooling-off period. Statutory holidays, Sundays, and any day the dealership is closed do not count. So if you sign a lease on a Saturday, and the dealership is closed on Sunday, Monday is the cooling-off day when you can cancel the contract.

You can waive (give up) the cooling-off period. If you want to do that, you must do it in writing. Read the lease documents carefully because they may include a waiver.

Common questions

What can happen if I have trouble paying under a lease?

If you fail to make a payment under a lease, this is called a default. If you default under the lease, the leasing company may be able to take the vehicle back (seize it) or sue you for all remaining lease payments. Depending on the lease agreement and the use you put the vehicle to, they may be able to do both.

Key is whether the lease is viewed under the law as a “true lease” or a “secured lease”. Generally, a true lease is one where at the end of the lease, the cost to buy the vehicle is an amount close to the vehicle’s market value. A secured lease, generally speaking, is one where at the end of the lease, the cost to buy the vehicle is very little. Put another way, under a secured lease, you will have paid almost the entire value of the vehicle by the end of the lease. (There are other factors that go in to determining whether a lease is a true lease or a secured lease. It is best to get legal advice on how your lease might be characterized.)

If the lease is a secured lease and for personal use

Under the law in BC, two rules kick in to protect you if the lease is a secured lease and the vehicle is used primarily for “personal, family or household purposes”. If you default on the lease, the leasing company can seize the vehicle. Or they can sue you for the amount owing on the lease. But they can’t do both. This is called the “seize or sue rule”.

The “two-thirds rule” comes into play if you’ve paid back at least two-thirds of what you owe under a secured lease for personal use. In this case, the creditor needs a court order before seizing the vehicle. If you’ve paid back less than two-thirds, the creditor can seize the vehicle without going to court.

If the lease is a true lease or for business use

If the lease is a true lease, things are different. They’re also different if the vehicle is used primarily for business purposes. In either case, if you default on the lease, a creditor may be able to sue you and seize the vehicle. For more on the law relating to secured debts, see our information on buying on credit (no. 246).

Are there other ways the law is different for a business lease?

When you lease a vehicle for business purposes, you can deduct the lease payments from the business’ income for tax purposes. You don’t typically get a tax deduction for a consumer lease. Check with Canada Revenue Agency for details.

Several BC laws offer protection when you lease goods for personal use, but not when you lease goods for business use. For example, under the Sale of Goods Act, if you lease a new car, a term in the lease agreement waiving the legal warranty implied by law is void — if the lease is for personal use. If the lease is for business purposes, such a waiver is not void.

Tip If you want to lease a vehicle for business purposes, you should get legal and accounting advice — before you lease.

What happens when a lease ends?

There are several possible outcomes when a lease ends. You should discuss them before you sign the lease. You may still owe money when the lease ends. The lease may say the vehicle goes back to the dealer, or you may have an option to buy it for a certain price. Whether you owe money depends on the type of lease you signed.

With a straight lease, you return the vehicle and owe nothing more. With a closed lease with an option to purchase, you pay an agreed-on amount if you decide to buy the vehicle. With an open lease with an option to purchase, you may have to pay an extra amount.

You may also have to pay extra if you drove more than the lease allowed or if the vehicle has more than normal wear. Some dealers may also want to charge other fees at the buy-out time. Before you sign a lease, ask about any fees the dealer will charge at the time of buy-out. Discuss these fees with the dealer and get them in writing — before you sign the lease agreement.

The dealer can use your security deposit to pay for kilometer overages or damage to the vehicle that must be repaired. The lease agreement should address when you get your security deposit back and when the dealer can keep it.

What if I decide to buy the vehicle at the end of the lease?

If you buy a vehicle at the end of the lease, it’s a new transaction. The dealer must make all the required declarations about the vehicle as they would on any sale, including the declaration that the vehicle meets the safety requirements of the Motor Vehicle Act when they sell it. For details of the required declarations, see People’s Law School’s information on buying a used car.

How a dealer ensures a vehicle meets the Motor Vehicle Act is a business decision — the Act does not say how. Generally, a dealer will do an inspection to ensure a vehicle meets the Act. Depending on the original lease, the dealer may charge you for the inspection. Discuss it with the dealer before you agree to lease a vehicle.

Get help

If you’re concerned about a dealer

The Vehicle Sales Authority of BC helps resolve complaints with licensed car dealers. Their website includes a vehicle buying guide and information about a compensation fund if you lease from a dealer that goes out of business.

Toll-free: 1-877-294-9889

Web: mvsabc.com