Leasing a Car

Script 196 gives information only, not legal advice. If you have a legal problem or need legal advice, you should speak to a lawyer. For the name of a lawyer to consult, call Lawyer Referral at 604.687.3221 in the lower mainland or 1.800.663.1919 elsewhere in British Columbia.

This script explains leasing a car in BC for personal or family use (consumer leases). It does not cover business leases. Cars are expensive machines. Before you lease one, you should compare leasing with buying to see which is best for you.

What is a lease?
A lease is an agreement to rent something, in this case, a car. A lease is usually long term, lasting for several months or years. At the start of a lease, you make a down payment and you may have to pay a security deposit. After that, you make monthly lease payments.

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

What types of car leases are there?

  • straight lease – with this, you return the car when the lease ends and owe nothing more. This is rarely used now for cars. 
  • lease with an option to purchase – this comes in two forms: open and closed
    • closed – you just pay the agreed-on amount if you decide to buy the car at the end of the lease.
    • open – you may have to pay an extra amount at the end of the lease. How much more you have to pay is set in the lease contract. Before signing a lease, a dealer estimates what a car will be worth at the end of the lease (the residual value) and then calculates the monthly payments based on that estimate. If the car 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 car has more than normal wear.

Leasing often means a lower down payment and monthly payments compared to buying. Leasing may also mean lower taxes because taxes are based on the monthly payments, not on the total purchase price. Many drivers can afford a more expensive model, or one with more options, if they lease.

On the other hand, you pay interest on a lease, so it may cost more, in total, to lease than to buy a car without financing. And when you lease, the dealer or lease company still owns the car and may control who drives it and the maintenance schedule you have to pay for – even though you drive and insure the car, and make monthly lease payments for it.

What must a lease agreement tell you?
Section 30 of the BC Motor Dealer Act Regulation (available at www.bclaws.ca) requires a lease to consumers to have the following information:

  • a summary of costs and credits for any extended warranty due when you sign the lease.
  • all express warranties and guarantees for the motor vehicle made by the manufacturer or motor dealer.
  • who is responsible for maintaining and servicing the motor 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 motor vehicle, including any limit on who can drive it and any requirement to get permission to take the motor vehicle outside of BC.
  • the amount of tax in each periodic payment you must make under the agreement, based on the applicable tax rate at the time of disclosure.
  • the cooling-off period (described in the next section).

Section 101 of the Business Practices and Consumer Protection Act (available at www.bclaws.ca) requires the dealer to give you a Lease Disclosure Statement before you sign the lease. Read it carefully. It has all the key terms and details of the lease.

What is a “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 car 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. You can waive, or give up, this right. If you choose to do so, you must do it in writing.

What can happen if you have trouble paying a lease?
If you default on a consumer lease (stop paying it), the dealer or creditor may be able to take the car back (seize it) or sue you for all remaining lease payments. Depending on the type of lease (a security lease or a true lease), they may be able to do both – you would need legal advice on that and on whether the “seize or sue” rule and the “two-thirds rule” apply. Business leases are different – a dealer or creditor may be able to sue you and seize the car. Generally, your rights and responsibilities depend on whether you sign a lease or a security agreement. You can talk to a lawyer before you lease to find out what type of agreement you are signing. As well, refer to script number 246, called “Buying Goods on Credit, Credit Cards & Credit Bureaus”.

What are the differences between consumer and business leases?
You don't normally get a tax deduction for a consumer lease, only for a business lease. Check with Canada Revenue Agency for details (www.cra-arc.gc.ca).

You don't get the protection of 3 laws if you lease for business: the Business Practices and Consumer Protection Act,  the Personal Property Security Act or the Motor Dealer Act. So if there's a mechanical problem with the car, you still have to continue paying the lease. The Sale of Goods Act may still give you some protection that the car is suitable for its purpose – but only if you lease the car mainly for personal, family, or household purposes. If you want to lease for business purposes, you should get legal and accounting advice before you lease. All these laws are available at www.bclaws.ca.

What happens when a lease ends?
You may still owe a lot of money when the lease ends. Either the car 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 (types of leases are explained earlier in this script). 

With a straight lease, you return the car and owe nothing more. With a closed lease with an option to purchase, you pay just the agreed-on amount if you decide to buy the car. But 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 car has more than normal wear. And dealers may want to charge other fees at the buy-out time. So before you sign a lease, ask about any fees that the dealer will charge at the time of buy-out. Discuss them with the dealer and get them in writing – before you sign the lease.

If you buy a vehicle at the end of the lease, it’s a new transaction. So motor dealers and salespeople must make all their required declarations to you, especially the declaration that the vehicle meets the Motor Vehicle Act when it is sold. The declarations are listed in the Motor Vehicle Sales Authority of BC’s glossary atwww.mvsabc.com. Click on “Consumers Resources”, then on “Buying Tips”, and then on “Glossary of Terms”.

How a dealer ensures that 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 the vehicle meets the Act’s requirements. 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.


Summary
Leasing a car is quite different from buying one. If you lease a car, you have less protection than if you buy. Leases are usually long term and usually help the dealer more than you, the consumer.

Read the lease agreement carefully and consider taking it to a lawyer before you sign. For more information on leasing a car, check the website of the Motor Vehicle Sales Authority of BC at www.mvsabc.com. Search for “leasing” and then click on “Is Leasing a Vehicle for me”. It has information on consumer help and complaints and the Motor Dealer Customer Compensation Fund (which may cover financial losses from leasing a vehicle if the dealer is no longer in business). 

[updated October 2012]


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