When Duncan McDonald saw an online ad in 2021 promising lower utility bills if he replaced his water heater, he seized the opportunity.
The company offered to lease the Orillia, Ont., resident a tankless water heater for $80 a month — significantly less than the $120 he was spending on hydro at the time. The sales representative also claimed his existing water heater was old and that any leaks wouldn’t be covered by insurance.
“By the time we sat down at the table, I asked them, ‘How do you make your money?’ It was the right question, but they didn’t answer,” said McDonald, who was persuaded to sign the lease agreement anyway.
After seeing a CBC Marketplace investigation on home-equipment rentals several months later, McDonald discovered the company had registered — without his knowledge — a security interest in his home for $13,000, despite the water heater being worth only $1,100.
Unable to reach the sales representative or anyone else at the company, McDonald stopped making his lease payments. He hired Dennis Crawford, a litigator who has helped dozens of homeowners bring civil lawsuits against home-equipment rental companies, to dispute the contract.
Now, homeowners like McDonald may be able to rest easier.
Earlier this month, Ontario unanimously passed the Homeowner Protection Act, 2024. The legislation will end a practice that has seen thousands of Ontarians unwittingly sign contracts that enable home-equipment rental companies to take security interests in their homes.
A security interest is similar to a mortgage. It gives a lender a claim on a borrower’s home to ensure that a loan is paid back. For many homeowners, getting rid of a security interest has meant paying sizable sums to purchase the equipment outright — often at a cost well in excess of the equipment’s true value — or fighting costly legal battles.
“This is one of those occasions in the Ontario legislature when there was a consensus among parties,” said Tim Hudak, CEO of the Ontario Real Estate Association who led Ontario’s Progressive Conservative party from 2009 to 2014.
“The NDP Official Opposition took an unprecedented move to work with the government in having [the act] pass committee as well as both second and third reading within a single day,” said Tom Rakocevic, the NDP’s consumer protection critic, in a written statement. The parties recognized that waiting until the fall would likely result in more Ontarians being harmed, he says.
The number of Ontarians affected by consumer security interests has increased significantly, according to government data. The number of registered security interests rose from about 2,000 registrations a year in the early 2000s to more than 58,000 in 2023.
Ontario’s new legislation prohibits the registration of security interests — formally known as a Notice of Security Interest — for property that is primarily used for personal, family or household purposes, such as air conditioning units and water heaters.
“While [Notices of Security Interest] may have been a legitimate tool at some point in time, it has become a refuge for criminals who were abusing homeowners with expensive, unfair and unclear contracts,” said Hudak.
Canadian Affairs reviewed an air conditioner lease contract by the Ontario Energy Group. The home-equipment rental company agreed in 2021 to cancel 225 lease agreements and pay $15-million to settle a class action lawsuit that alleged the company had violated the Consumer Protection Act.
The contract says that the company has the right to register a security interest in the lessee’s property. But it doesn’t state that the company will do so or what the value of the security interest will be.
“The more you think about that, the more insane it seems,” says Crawford, the lawyer who represented McDonald.
“Imagine that you borrowed money from a bank to purchase your home. The bank can’t just put the mortgage on your property without authorization,” he said. But with home equipment, “the homeowner did not have to sign off on the registration of this encumbrance against their house.”
Another problem was that home-equipment rental companies were not obliged to ascribe fair market value to their equipment, says Crawford.
Another one of Crawford’s clients agreed to rent a water filter that normally sells on the market for around $200. Unbeknownst to his client, the rental company registered a security interest on his property for $13,500 — almost 70 times the asset’s real value.
Sales tactics
A common sales tactic of home-equipment rental companies, says Crawford, is to imply that they are working at arms length with the government to facilitate environmentally-friendly consumer choices.
“Because of the socialist political culture we have in Canada, it wasn’t far-fetched for people to believe that someone was going to give you money to replace your water heater for some sort of green program.”
Several of these companies, including Ontario Green Savings, Ontario Energy Group and Crown Crest Capital, are or have been subject to class action lawsuits or individual lawsuits.
The companies also frequently target seniors, people with language barriers or other vulnerable individuals, Crawford says.
McDonald, who is retired, says his contract granted him a 10-day “cooling off” period to cancel the agreement after signing it. Yet, the day after signing the contract, the rental company was in his house ripping out his old water heater.
Crawford’s litigation strategy has been to establish that rental companies have been deceptive in their practices, in violation of the Consumer Protection Act.
“It was about how the contract was written,” said McDonald, who succeeded in getting his contract cancelled after two years of fighting. “Anything that was relevant to being aware [of the security interest] was either not on the front end of the contract or printed out [so] that you couldn’t notice or see it.”
Sam Babe, a partner at Aird Berlis LLP who has clients that finance home equipment, says a simple requirement for companies to provide consumers with notice that they were registering a security interest would have been sufficient to address the issue.
Crawford disagrees.
“These bad actors are extremely creative,” he said. “If you had reformed the instrument by making a tighter loophole for them to jump through, they would have revised their procedure so that they could at least argue that they were jumping through that tighter loophole.”
Babe wrote in a firm blog post that lenders will still have the ability to take a homeowner to court, win a judgment and register a claim on their home. If successful, this process would leave the homeowner in a similar position as having a security interest on their home.
But that’s exactly what should be happening, Crawford says.
“Financiers of consumer goods should have to follow the exact same process that any other company that is owed money has to follow: going to Small Claims Court and getting a judgment.”
Babe also contends the legislation will likely result in a reduction in the availability of financing for home equipment to account for increased enforcement costs and decreased likelihood of repayment.
No way to win
Ontario’s new legislation also says that existing security interests in consumer property are deemed to have expired as of June 5.
But homeowners need to apply to have the security interest removed.
“That can be done relatively quickly and at minimal cost by a local lawyer,” said Crawford. “It’s just a procedural matter.”
The irony, McDonald says, is that the water tank that he leased — which was supposedly more efficient because it only heated water when turned on — was a let down.
“To this day, I can turn the water on, run around the block, and it still won’t be hot. It is a terrible product,” he said.
McDonald just feels lucky he had the means and time to get himself out of the contract.
“Here is the problem: most people didn’t know there was a [security interest] until they went to sell their house,” he said.
“There is no way to ‘win’ against them. The government was correct to pass this legislation.”
