Cow Harbour True Lease Characterization Decision Released: Moving In The Right Direction

Whether a lease is a "true" or "finance" lease has been debated in Canadian courts for decades in many different contexts. The consequences of the categorization of a lease can have a material impact on the recovery that a lessor may have in an insolvency of its lessee. The Alberta Court of Queen's Bench recently released its decision in the matter of Royal Bank of Canada v. Cow Harbour Ltd. and 1134252 Alberta Ltd. ("Cow Harbour") on January 23, 2012. This is one of the most important recent decisions in this debate and provides significant guidance as to how leases are to be classified in insolvency cases. We will review, at a high level, the tests that the court used in making its decision and offer an alternative analysis of what we believe should be the proper process.