Getting a Seller's Lender to Discharge Security in British Columbia

You are buying a business in British Columbia, and your Personal Property Registry search shows a lender's registration against the seller's equipment, inventory or receivables. That does not mean the deal is dead. It does mean you need a plan for getting that claim removed or reduced before you hand over your money.

This article explains how those registrations work, why a lender may rank ahead of you, and how a written demand under the Personal Property Security Act can be used to require a discharge or amendment. It is general information, so have a lawyer review your specific search results and deal documents.

This article covers the law of British Columbia.

What the registration on your search result means

The BC Personal Property Registry records security agreements under the Personal Property Security Act, as well as commercial liens and certain buyers' interests in goods left with the seller. A person may request a name search, a serial-number search, a registration-number search or copies of registered documents.

A lender registers a financing statement to perfect its security interest. That registration can be made before the security agreement is even signed, so a search can show a lender's claim that is not yet fully in use. The registration takes effect from the time the registry assigns to it.

Registrations run for 1 to 25 years at $5 per year, or for an infinite term at $500, so an old-looking registration may still be live. Check the term shown in the search result rather than assuming it has lapsed.

Why a lender can rank ahead of you

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

There is an important exception. A purchase money security interest, which secures all or part of the purchase price of the collateral, 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 a buyer takes free of security interests. That rule applies to a buyer of goods sold in the ordinary course of the seller's business, such as a customer buying inventory, and even then not if the buyer knows the sale breaches the security agreement. It protects customers, not a purchaser of the whole business or its assets.

Using a written demand to require a discharge

A debtor, or any person with an interest in property within the collateral description, may 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 means the seller's lender can be required to discharge its registration at closing, or to amend it so it no longer covers the assets you are buying. Whether a demand is the right tool, and who should serve it, depends on your deal and on the wording of the registration, so a lawyer can confirm.

Timing and the limits of a PPR search

Because the 40-day window can be longer than your planned closing date, do not leave the demand until the last minute. Many buyers instead build the discharge into the agreement, so that the seller's debt is paid out of the sale proceeds and the lender provides its discharge on closing. The details are worth settling with a lawyer.

Also remember what a PPR search does not show. Builders' liens, family maintenance liens and some other liens are filed with other agencies, not the PPR, so a PPR search alone does not reveal every lien. If the business owns or holds an interest in land, a Land Title Office title search is a separate step, and it covers land only, not equipment or inventory.

• A regular title search may miss a builders' lien submitted the same day but not yet registered.
• A bankruptcy and insolvency search is a further check on the seller.
• A PST clearance certificate addresses a different risk, the seller's unpaid PST.

What to do next

Direct online PPR access is limited to professionals with a premium account, so you will usually search through Service BC, a mailed request, or a lawyer or search agent. A government-staff search costs $10.

• Get the search results and note each secured party, the collateral description and the term of each registration.
• Identify any recent equipment financing that may be a purchase money security interest.
• Ask the seller which debts the registrations secure and how much is owing.
• Build lender discharges into the purchase agreement as a closing condition.
• Allow enough time before closing for a written demand and the 40-day response period.
• Search for liens that the PPR does not cover, and have a lawyer review the result.

Frequently asked questions