Removing a Seller's Lender Lien Before Buying a Business in British Columbia

You have searched the Personal Property Registry and found a lender's financing statement against the business you want to buy. It may cover equipment, inventory or receivables, and it may look small or out of date. You are now wondering whether you can ignore it or whether it has to be dealt with before you close.

This article explains why that registration matters, how a lender can rank ahead of you, and how a written demand can be used to get it discharged. It also covers what a registry search will not show, and the separate PST step buyers often miss. It does not explain how to run the search itself.

This article covers the law of British Columbia.

Why a small or old registration still matters

Registering a financing statement perfects the lender's security interest. It takes effect from the time the registry assigns to it, and it can be registered before the security agreement is even made. So a search can show a lender's claim that is not yet fully in use, but which could become so.

Age does not tell you much either. Registrations for security agreements and commercial liens run for 1 to 25 years, or for an infinite term. An old registration may still be live, so check the expiry or term shown in your search result rather than assuming it has lapsed.

Why the lender may rank ahead of you

Priority between perfected security interests in the same collateral is generally decided by the order of registration, possession or perfection. That is why a prior lender's registration against business equipment, inventory or receivables can rank ahead of a buyer's claim.

There is a further wrinkle for equipment. A purchase money security interest is one taken to secure all or part of the purchase price of the collateral, and it can have priority over other security interests in the same collateral. It may be perfected within 15 days after the debtor obtains possession, so a recent equipment-financing lender may rank first.

You may have heard that buyers take free of security interests. That protection is narrower than it sounds. A buyer of goods sold in the ordinary course of the seller's business takes free of a perfected or unperfected security interest, unless the buyer knows the sale breaches the security agreement. It protects customers buying inventory. It does not protect someone buying the whole business or its assets.

Using a written demand to force a discharge

The Personal Property Security Act lets a debtor, or any person with an interest in property within the collateral description, give the secured party a written demand to amend or discharge a registration. The secured party must then register a financing change statement within 40 days. No fee may be charged for complying unless one was previously agreed.

In practice, this is the tool behind requiring the seller's lender to discharge at closing. The seller is the debtor, so the seller is usually the one who signs the demand. Whether you, as the buyer, have enough of an interest to send one yourself depends on the deal, so ask a lawyer before relying on that.

A demand is not a substitute for dealing with the debt. Lenders usually expect the loan to be paid out or otherwise settled before they discharge, and whether a lender must discharge in a particular situation depends on the facts and the documents.

Making the discharge a condition of closing

Because the 40-day window can be longer than your timeline, build the discharge into the purchase agreement rather than leaving it to chance. Common approaches, which a lawyer can tailor to your deal, include:

• Naming the registration (by its registration number from your search) in the agreement and requiring it to be discharged or amended at or before closing.
• Having the seller give the written demand early, so the lender's 40-day period starts running.
• Arranging for the seller's loan to be paid from the sale proceeds at closing, with the lender's discharge delivered in return.
• Running a fresh search just before closing to confirm the registration has been removed or narrowed.

What a clean search will not tell you

Even after the lender's registration is gone, a Personal Property Registry search alone does not reveal every lien. Builders' liens, family maintenance liens and some other liens are filed with other agencies, not the registry. If the business owns land, a Land Title Office title search covers the land only, not equipment or inventory. A regular title search can also miss a builders' lien submitted for registration the same day but not yet registered, which is why lenders and buyers' lawyers often order a separate after-3:00 p.m. search.

PST is a separate risk. Government guidance tells a buyer to obtain a PST clearance certificate before buying a business, including in bulk transactions. Without one, the buyer is liable for an amount equal to any outstanding amount owed by the seller. A bulk transaction includes buying substantially all (more than 90%) of the seller's inventory in B.C., substantially all goods or software used in the B.C. business, or an interest in that business. The buyer applies online or by Application for Clearance (FIN 447), with the seller's consent.

What to do next

• List every registration from your search, with its collateral description and its expiry or term.
• Ask the seller which loans are still owing and which lenders will be paid out at closing.
• Ask a lawyer to build the discharge, and the timing of any written demand, into the purchase agreement.
• Apply for the PST clearance certificate early, with the seller's consent.
• Check for liens filed outside the registry, such as builders' liens against any land.
• Re-search just before closing and keep copies of the discharge confirmations.

Frequently asked questions