Liens on trade-ins and repairs

Two Ontario statutes govern liens on motor vehicles, and an OMVIC registrant has to read both. The Personal Property Security Act handles the bank loan registered against a financed customer’s trade-in; the Repair and Storage Liens Act handles the dealer’s own claim for unpaid repair work or storage. Section 13(c) of the Sale of Goods Act sits behind both: every retail buyer is owed a vehicle free of any charge or encumbrance that was not declared at the time the contract was made. That implied warranty is what turns a missed lien on a trade-in into a Motor Vehicle Dealers Act problem when the new buyer registers the vehicle and the prior bank’s interest follows it.

This category tests the mechanics: how to search the personal property registry, what a payout statement has to show, when a repairer has a possessory or non-possessory lien, how long it lasts, and how to register or discharge one. The rules apply to every registered dealer who takes a vehicle on trade or who runs a service department.

What this category covers

The questions in this category turn on three things: identifying liens on inventory before a dealer commits to buying or selling it, paying out a financed trade-in correctly, and the dealer’s own statutory liens when a customer leaves a vehicle unpaid for repair or storage. Expect both retail-side scenarios (a consumer tradein with an unpaid loan) and shop-side scenarios (a customer who never picks up their car).

Key rules to remember

Lien searches and the Personal Property Security Act registry

Section 23 of the Personal Property Security Act provides that registration of a financing statement perfects a security interest in collateral, including a financed motor vehicle. Section 20 says an unperfected interest is subordinate to a competing perfected interest, but a perfected interest registered against the vehicle identification number runs with the vehicle. Section 28(1) of the same Act protects a buyer of goods sold in the ordinary course of business of the seller, so a retail buyer from a dealer takes free of a security interest given by the dealer; that protection does not apply to a financed customer transferring a vehicle to a dealer. A dealer therefore has to search the registry before taking a tradein, against both the customer’s name and the vehicle identification number, and confirm the search certificate under section 43 matches the vehicle being delivered.

Paying out a financed trade-in

Where a tradein has a registered lien, the safe practice is to require the lender’s payout statement, fund the payout directly to the lender, and obtain written confirmation that the lender will register a financing change statement. Section 56 of the Personal Property Security Act allows any person with an interest in the collateral to demand registration of a discharge once the secured obligations are performed; the secured party who fails to register the change within ten days of receiving the demand owes the demanding party $500 plus damages. Section 57 imposes a thirty-day duty on the secured party to register the discharge automatically once the loan is paid off, when the collateral is consumer goods. The dealer who takes a tradein and then resells the vehicle without satisfying the lien transfers a vehicle that still carries the lender’s perfected interest, in breach of section 13(c) of the Sale of Goods Act and OMVIC’s expectations under the Code of Ethics.

A repairer’s possessory lien under the Repair and Storage Liens Act

Section 3(1) of the Repair and Storage Liens Act gives a repairer a lien on the vehicle for the agreed price of the repair, or if no price was agreed, the fair value of the work done. The lien arises when the repair is commenced and lets the repairer hold the vehicle until the bill is paid. Section 6 makes a possessory lien rank ahead of every other interest in the vehicle while the repairer keeps possession. Section 5 destroys the lien the moment possession is given up to the owner, which is why dealers should not release a vehicle on a promise to pay later. Section 4 gives a storer the equivalent right where the dealer has agreed to store a vehicle for a charge, with a notice obligation to perfected secured parties within sixty days when the storer knows the deliverer was not the owner.

Non-possessory liens, registration, and sale

Once the vehicle is released, section 7 converts the possessory lien into a non-possessory lien for the unpaid balance, but only if the customer has signed an acknowledgment of indebtedness. Section 10 requires registration of a claim for lien on the personal property registry before the lien is enforceable against third parties; the registration runs for up to three years and can be extended by a change statement. Section 14 lets the lien claimant deliver the registered claim and a direction to seize to the local sheriff, who must seize the vehicle and deliver it to the lien claimant. Section 15 then governs the sale: the lien claimant must give at least fifteen days’ written notice of intention to sell to the customer, the registered owner, every secured party perfected against the vehicle, and every other registered lien claimant. Section 16 sets the priority order for proceeds of sale, paying expenses and the selling lien claimant first, then other registered liens, then secured parties, with any surplus going to the owner. Section 12 forces the lien claimant to register a discharge within thirty days once the lien is paid or the vehicle is sold, on penalty of $100 plus damages.

Common mistakes

• Running a search against the customer’s name only and missing a lien registered against the vehicle identification number, or vice versa. Dealers should run both, every time.
• Treating an old payoff quote as current. Lender payout statements have an expiry; a stale quote leaves a residual balance the dealer ends up absorbing.
• Paying the customer the trade equity directly and trusting the customer to clear the lien. The lender’s interest survives the trade until the loan is satisfied and the financing statement is amended.
• Releasing a repaired vehicle to a customer on a postdated cheque or a promise to pay, then discovering section 5 has discharged the possessory lien.
• Skipping the signed acknowledgment of indebtedness when releasing a repaired vehicle. Section 7(5) of the Repair and Storage Liens Act makes a non-possessory lien enforceable only with that acknowledgment, so the dealer who relies on a verbal promise has no perfected claim.
• Trying to sell a stored or unrepaired vehicle without registering a claim for lien and without giving the section 15 notice. The buyer at that sale takes nothing, and the dealer is exposed under section 21 for non-compliance damages.

How OMVIC enforces this

Selling a vehicle that still carries a lien, or failing to pay out a tradein loan promptly, is one of the fastest paths to discipline at OMVIC. The Registrar treats the conduct as a breach of the Code of Ethics in Ontario Regulation 332/08, opening a referral to the Discipline Committee for fines of up to $25,000 per breach, conditions on registration, or a recommendation to revoke registration under section 9 of the Motor Vehicle Dealers Act, 2002. Where the dealer becomes insolvent before paying out the tradein loan, consumers can claim against the Motor Vehicle Dealers Compensation Fund for the unpaid lien amount. Repeat offenders face a proposal to refuse renewal that the dealer can appeal to the Licence Appeal Tribunal, which has consistently upheld registrar action where lien-payout misconduct is proven.

Where to learn more

The full text of the Personal Property Security Act and the Repair and Storage Liens Act is on this site, with section anchors for every rule cited above. The Personal Property Security Act forms regulation and the Repair and Storage Liens Act general regulation set out the exact fields a financing statement and a claim for lien must contain. Read sections 20, 28, 43, 55, 56, and 57 of the Personal Property Security Act and sections 3, 4, 7, 10, 12, 14, 15, and 16 of the Repair and Storage Liens Act before sitting the certification. The DealerPrep iPhone app carries the full practice question bank for this category for paid subscribers.