Letter to the Ontario Minister of Government and Consumer Services advocating for increased disclosure in rental appliance contracts

July 14, 2020

On this page:

The Honourable Lisa Thompson
Minister of Government and Consumer Services
Ministry of Government and Consumer Services
777 Bay Street, 5th floor
Toronto, ON  M7A 2J3

Dear Minister Thompson:

I am writing to you further to the request from the Ministry of Government and Consumer Services (MGCS) that the Competition Bureau (Bureau) provide its views in respect of competition regarding the rental appliance industry in Ontario. The Bureau's detailed views are presented in the enclosed submission and are made pursuant to section 126 of the Competition Act.

As outlined in our submission, the Bureau believes that the key terms in rental appliance contracts should be disclosed in a prominent, simple, clear and accessible manner and that this will benefit Ontarians. These disclosures would better assist consumers if they were provided prior to contract formation and accompanied, at that time, by a copy of the relevant rental appliance contract and buyout schedule, if applicable. The Bureau also submits that consumers would benefit from the implementation of rules regarding the characterization of contracts as "rental" contracts, as Ontarians may misunderstand the nature of certain contracts based on their characterization as "rental". These proposed changes will enable Ontarians to make better-informed choices, thereby spurring the kind of rivalry between competitors that leads to lower prices, increased product choice, increased quality of service, and greater levels of innovation.

The Bureau understands that legislation overseen by the MGCS, namely the Consumer Protection Act (CPA) and associated regulations, already mandates suppliers of rental appliances to make certain disclosures. Despite these requirements, the Bureau receives numerous complaints from Ontarians who were bound by rental appliance contracts without fully understanding them, often after having bought a property that had a rental appliance installed. In fact, Ontario's rental appliance industry represents a very significant source of complaints dealt with by the Bureau's Monopolistic Practices Directorate (MPD) over the past several years, accounting for more than 20% of all complaints received by MPD in the 2018‑2019 fiscal year. The Bureau believes that greater disclosure and consumer awareness prior to contract formation may address some of these concerns.

The Bureau recognizes that the issues identified may be partly due to some suppliers' non-compliance with the existing legislation, rather than due to insufficiencies in the legislation. The Bureau is encouraged that the MGCS has announced plans to conduct a comprehensive review of the CPA to better protect consumers with more efficient requirements, improve compliance by businesses and strengthen enforcement with clearer requirements. Recognizing that certain protections already exist, appropriate remedies to issues discussed in the submission may include actions to increase suppliers' compliance with existing legislation and/or actions to increase consumers' awareness of their existing rights. The Bureau hopes that this submission helps inform the MGCS's review and may lead to more competitive outcomes for Ontario's consumers.

Consumers are better positioned to make informed decisions when they are provided with all the relevant information at the right time. While the Bureau generally prefers allowing market forces to achieve desired policy objectives, the Bureau appreciates that regulatory intervention may best assist in enhancing competition and increasing consumer welfare in this instance.

We appreciate this opportunity to provide our comments for your consideration.

Yours truly,

Anthony Durocher
Deputy Commissioner of Competition
Competition Promotion Branch

Submission to the Ontario Minister of Government and Consumer Services Pursuant to Section 126 of the Competition Act

The Bureau submits that ensuring that key contractual terms are disclosed in a simple, clear and accessible format, particularly prior to contract formation, assists consumers in better understanding proposed rental appliance contracts.Footnote 1 Disclosure enables consumers to better compare competing offers and otherwise make informed choices.Footnote 2 In order to fully benefit consumers, the Bureau submits that such disclosures need to be provided prior to contract formation or transfer, and should be accompanied by a copy of the relevant rental appliance contract and buyout schedule, if applicable.

The Ontario CPA, and associated regulations, already imposes certain disclosure requirements on suppliers of rental appliances. Nevertheless, the Bureau's experience is that a number of consumers still appear to lack relevant information with respect to the rental appliance contracts under which they are bound. Indeed, the Bureau receives numerous complaints from Ontarians who were bound by rental appliance contracts without fully understanding them, often after having bought a residential property that contained a rental appliance. The Bureau is encouraged that the MGCS has announced plans to conduct a comprehensive review of the CPA in order to "better protect consumers with more efficient requirements, improve compliance by businesses and strengthen enforcement with clearer requirements". The Bureau hopes that the information conveyed in this submission helps inform the MGCS' review, mitigates the types of issues highlighted in this submission and may lead to more competitive outcomes for Ontario's consumers.

The Bureau does, however, recognize that the apparent lack of consumer understanding of rental contract terms may not solely be due to gaps in the existing legislation. Rather, this may be due in part to non‑compliance with the existing requirements by some suppliers of these rental appliances. The recommendations in this submission are made with a view to addressing the concerns expressed by complainants to the Bureau and are informed by the Bureau's knowledge of these markets. The Bureau understands that, in instances where the concerns are a result of a supplier's non‑compliance with the CPA and associated regulations, solutions could also include adopting measures to increase compliance with existing legislation and/or increasing consumer awareness of their rights under the CPA.

The Bureau's views on the potential competitive benefits of increased disclosure in rental appliance contracts are provided pursuant to section 126 of the Competition Act.Footnote 3 As an advocate for competition, the Bureau generally takes the position that policy makers and regulators should only enact laws or regulate in a manner that relies on market forces as much as possible to achieve their policy objectives. Where market forces are insufficient to achieve certain policy objectives, the Bureau strives to assist regulators to implement policies that achieve their policy objectives while respecting, to the greatest extent possible, competition's central role in the Canadian economy.

In addition to its advocacy role, the Bureau also undertakes enforcement work to ensure that Canadian businesses and consumers prosper in a competitive and innovative marketplace. As part of its mandate, the Bureau investigates potentially anti-competitive conduct, such as abuse of dominance and deceptive marketing practices. In fact, the Bureau has conducted several investigations into the rental appliance sector, specifically with respect to rental water heaters, dating back to the early 2000s, and secured remedies that have benefited, and continue to benefit, Ontarians.Footnote 4 This enforcement work is limited to instances where the Bureau can establish that a provision of the Competition Act has been, or may be, contravened.

Background

The rental appliance industry represents the largest source of complaints received by the Bureau's Monopolistic Practices Directorate (MPD) over the period spanning from the 2015‑2016 to the 2018‑2019 fiscal years.Footnote 5 The vast majority of these complaints came from consumers seeking to exit rental water heater contracts. Close to 99% of water-heater related complaints received by MPD originate from Ontario, and these complaints represent more than 20% of all complaints MPD received in the 2018‑2019 fiscal year. That is more than four of the other largest sources of complaints from across Canada combined: complaints in the waste, real estate, telecom, and airline industries.

Leading sectors of complaints received by MPD

  • Leading sectors of complaints received by MPD
    Leading sectors of complaints received by MPD
      2015‑16 2016‑17 2017‑18 2018‑19
    Water Heaters 19% 16% 26% 21%
    Waste 8% 5% 7% 2%
    Real Estate 6% 7% 3% 5%
    Telecom 5% 4% 10% 5%
    Airlines 1% 25% 0.3% 1%

Water heater-related complaints received by MPD fall within two principal categories:Footnote 6

  1. complaints relating to returnable rental water heaters; and
  2. complaints relating to mandatory buyout contracts.

Over the past few years, the majority of water heater‑related complaints to MPD have related to mandatory buyout contracts. This is a type of rental appliance contract in which the only way to end the contract before the end of the rental term is to purchase the water heater at a rate determined by the rental appliance provider. The Bureau does not believe that mandatory buyout contracts are intrinsically problematic for competition where, for instance, they are required to recoup costs incurred when installing an appliance in a customer's home and the terms of the contract are consistent with that purpose. However, in some cases, buyout fees exceed the rental appliance's fair market value and/or the company's initial investment. Furthermore, mandatory buyout contracts may create impediments to competition in certain cases depending on the amount of the buyout fees or the length of time during which a buyout is mandatory.Footnote 7 By way of example, where buyout fees are very high, a significant proportion of complainants asserted that the high cost of the buyout fees made it financially difficult to switch to a competitor. As a result, many chose to continue the rental relationship to avoid paying the fee. These kinds of costs have the potential to harm competition by making it harder for other companies to win new customers or by reducing the incentive for established service providers to discount prices and innovate.

In speaking with complainants, the Bureau learned that many customers did not appear to understand the key terms of their prospective rental contract before entering into it. For example, many complaints were from homebuyers who did not realize that the "rental contracts" assumed as part of their home purchase did not have a return option. Many other complaints came from consumers who had their current provider replace a broken rental appliance, only to later realize that the replacement came with new terms and conditions, such as a fixed buyout schedule laying out the buyout fee as the only way to exit the contract for a period of time. A large number of these and other complainants indicated that they were not given written information regarding the cost of the buyout fees until after they were bound by the contract.Footnote 8

In the Bureau's view, these complaints suggest that many Ontarians were (and many still are) not given the opportunity to make a fully informed choice. When consumers do not receive all of the key terms of a proposed rental contract in a prominent and easily accessible manner, they cannot properly compare and assess their options, including competitors' offers. As a result, Ontarians will not fully benefit from the kind of rivalry between competitors that leads to lower prices, increased product choice, increased quality of service, and greater levels of innovation.

Greater consumer awareness prior to contract formation may address some of these concerns. Below, we detail three types of issues reported by complainants and we propose ways in which consumer awareness and understanding can be increased:

  • Raising consumer awareness of their rights under the CPA through information campaigns;
  • Ensuring suppliers prominently disclose key contractual information in writing and in a clear, simple and accessible manner prior to contract formation; and
  • Implementing specific rules with respect to characterizing contracts as "rental".

Disclosure requirements

Overview

In complaints to the Bureau, consumers have stated that material information regarding rental appliance contracts (such as the termination options, buyout price, or length of contract) is often not disclosed in an easily accessible manner before contract formation. This often occurs when consumers enter into a rental contract as part of a broader contract (e.g., during the purchase of a home), or when they receive the contract details orally (e.g., during the exchange of a broken appliance for a new one, or when contracting over the phone).

Whether entering into a rental appliance contract through the purchase of a home (whether new construction or resale), through the exchange of an old water heater, or through the formation of a new business relationship, many consumers currently lack information that is clear, simple, standardized, and accessible. In such situations, information asymmetries between the supplier and the consumer can impair the consumer's ability to properly assess and compare competing offers. This can lead to consumers making suboptimal choices, and may soften competitors' incentives to offer lower prices, better quality, or innovative products.

The MGCS may wish to consider implementing the following requirements as a means of increasing the likelihood that rental appliance customers receive adequate information at the right time.

When the rental appliance contract is transferred through the sale of a home

The Bureau receives numerous complaints from consumers who have purchased a home—either new construction or resale—that included a rental appliance for which they did not understand the terms of the contract. The Bureau understands that, while buyers may have been aware that they assumed the rental appliance contract as part of the home purchase, many did not understand the details of the agreement such as the rental rates, termination options or buyout amounts.

In the absence of such details, the homebuyer is forced to either make assumptions about these secondary agreements, or spend time and effort to seek out such information. The purchase of real property can be highly time-sensitive, and a rental appliance contract may be only one of many competing considerations. As such, if the details of a rental appliance contract are not readily available, the consumer may not be able to gather the information necessary to make an informed decision, leading to suboptimal choices (whether the consumer offers too high a price, too low a price, or no offer at all). As such, the Bureau believes that it may be appropriate to consider policy measures that ensure consumers are further informed of the terms of a rental appliance contract while an agreement to purchase a home is being negotiated.

The Bureau understands that certain rental appliance companies currently require that home sellers inform home buyers that rental appliance contracts will be transferred to the buyer with the property. However, this may not happen in all cases. As a result, many consumers still appear to lack key information about the contracts that are transferred to them. While the Bureau understands that the MGCS does not directly regulate the conduct of home buyers or sellers, to the extent feasible, it may wish to consider implementing rules to bring the onus of the disclosure back to the rental appliance companies. For instance, to the extent possible, the MGCS could consider requiring that, in the case of a contract transfer, disclosure of contract details comes from rental companies themselves rather than the home sellers.

Alternatively, the MGCS may consider raising awareness among potential home buyers of the possibility that rental appliances contracts may be included in the purchase of a home, and the possible associated terms, through information campaigns. This would help consumers to pro-actively seek relevant information about rental appliance contracts that may be attached to the home, and assist them in making informed choices when buying a home.

When the rental appliance contract is formed through a product exchange or via phone

The Bureau has also been made aware that, in some cases, where a rental provider replaced old equipment, the consumer did not understand that they were entering into a new rental agreement with different terms than their previous contract. The Bureau further understands that these contracts are often entered into over the phone.Footnote 9 As such, rather than providing contractual information in writing prior to the contract formation, some rental appliance suppliers provide a brief oral summary of the rental appliance contract before installation (the Bureau understands that the section 46 of the CPA requires that a full written copy of the contract has to be provided at a later date).

The Bureau understands that the CPA mandates certain disclosure requirements for different categories of agreements. Consistent with comments above, despite these requirements, the Bureau nevertheless observes that buyout schedules are often not included in the terms and conditions of a rental contract and may not be included in oral summaries. As a result, consumers may not understand, at the point of contract formation, their buyout obligations if they seek to terminate the contract.

Also of note, the Bureau has been told of cases where rental appliance providers characterize their contracts in a manner that, according to the Bureau's understanding, reduces the level of disclosure and protection required by the CPA in cases where certain factors that motivated those stronger protections appear to be present. For instance, where it is necessary to enter into a new contract to install a replacement appliance, the technician present in the customer's home may encourage the customer to call the rental appliance provider to form the new contract. This may result in the supplier considering these types of contracts to be "remote agreements" for the purposes of the CPA, rather than "direct agreements", notwithstanding the technician's presence in the home as an advocate for the contract.

One possible action to address the above issues would be to prevent a rental appliance contract from being crystallized until the consumer has been provided with a document that sets out the key components of the contract in a prominent, simplified and clearly understandable format.Footnote 10 The MGCS could consider standardizing the form of the disclosure across various types of rental appliance contracts to help consumers better understand and effectively compare competing rental appliance providers, thereby facilitating competition.Footnote 11

The MGCS could also consider requiring suppliers to provide consumers with a written copy of the contract before it is formed. This could be done electronically prior to the technician's arrival (e.g. via e‑signature) or in-person before the technician installs the appliance. If the MGCS decides to mandate this requirement across various types of rental appliance contracts, the MGCS should also consider mandating the standardized disclosure of key terms in writing, as noted above.

Additionally, the MGCS may wish to consider measures that would ensure consumers ultimately receive similar disclosures as they would for a "direct agreement". If the MGCS is of the view that certain rental suppliers are currently not accurately categorizing agreements, this could be achieved through measures to ensure compliance with existing legislation. Similarly, the MGCS could raise consumers' awareness through information campaigns such that they would be better equipped to request the relevant information regarding their rental appliance contracts.

As a final note regarding the disclosure of contractual information, the Bureau would support measures to cause all applicable buyout schedules to be incorporated into the rental appliance contract itself, as well as mandatory disclosures of key terms. Such information is more likely to help consumers understand the true cost of the product and their requirements to switch to a competing offer.

Products represented as "rental" should actually be rentals

The Bureau has heard from consumers that referring to a contract as a "rental agreement" has, in some cases, created a general impression that the contract carries similar obligations as other rental contracts (e.g., car rental, house rental, etc.). This may lead one to believe that the contract can be terminated without undue penalty, on reasonable notice, and without retaining ownership of the rented property. Such beliefs may lead consumers to pay less attention to such contracts when agreeing to be bound by them (especially during complex, time-sensitive transactions like purchasing a home). 

If the rental contract lasts for the life of the asset, and the only early termination option is to purchase the asset, the MGCS may wish to consider whether such an asset is truly being "rented", and if it is not being rented, how such a contract should be classified. For example, such useful life contracts may be better classified as "lifetime leases", and fixed-term contracts may be better classified as an "X‑year lease".

Conclusion

The Bureau appreciates the MGCS' invitation for the Bureau to provide its views in respect of competition regarding the rental appliance sector in Ontario. Based on our experience investigating conduct in this sector and the significant number of customer complaints we have received, the Bureau believes that competition in Ontario would benefit from increased consumer awareness and greater upfront disclosures in the rental appliance sector.

While the existing legislation provides protections for consumers, such as disclosure requirements for suppliers of rental appliances, there may still be areas where consumers would benefit from further effective disclosure, particularly in the context of home purchases. The Bureau recognizes that the MGCS announced plans to review the CPA with a view to enhancing consumer protections and we are hopeful that this submission will inform the review process. As previously noted, it is possible that some of the issues reported to the Bureau through complaints may be caused in part by suppliers' non-compliance with requirements already in place; in such cases, remedies might include measures to increase suppliers' compliance with existing legislation and/or acted upon through measures to increase consumers' awareness of their existing rights under the CPA.

As a general rule, the prominent disclosure of contractual information in a simple, clear and accessible manner, enables informed consumer choice, which goes to the heart of the competitive process. Informed choice becomes critically important when consumers contemplate rental appliance contracts that may make it difficult to switch to a competitor, because such impediments have the potential to soften competition. With informed consumer choice, competition amongst firms is enhanced, and as a result, consumers and the economy may benefit from lower prices, increased product choice, increased quality of service, and greater levels of innovation.

Date modified: