Paul Anderson | November 2013 | Commercial Disputes and Transactions
The Personal Property Securities Act 2009 has been in force since 30 January 2012. To what extent does the Act impact upon landlords?
Who does this affect? Landlords, tenants and their advisers.
Overview of PPSA The PPSA came into force on 30 January 2012. It provides for all security interests in respect of personal property to be registered in one central registry called the Personal Property Securities Register or PPSR. As such, the PPSR replaces some 70 separate state and territory registries and 40 pieces of legislation.
What action should be taken?
Existing registrations on the 70 separate registries were automatically migrated to the new PPSR on the starting date.
A landlord should register under the PPSA every security interest in respect of a long term lease of personal property associated with a lease of premises.
Priorities are determined by date of registration. If two security interests compete in respect of one item of personal property, the first to be registered will prevail.
The Personal Properties Securities Act 2009 or PPSA has been in force for more than 18 months and represents one of the most significant reforms in Australian commercial law for many years. The only comparable reform in terms of impact in recent times would be the introduction of the GST in the year 2000.
The process of registration is internet or electronic based and is paperless. The process involves registration of a ‘financing statement’ in respect of each security interest.
However, despite its importance, there is a widespread lack of knowledge in the community not only as to the operation of the Act but as to its very existence. The aim of this paper is, firstly, to give a necessarily brief overview of the PPSA, and, secondly, to explore its impact upon landlords.
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PPSA and Landlords
Section 267 of the PPSA deals with failure to register a security interest. If the grantor of the security interest goes bankrupt or is wound up, then an unregistered security interest will be void as against the trustee in bankruptcy or liquidator.
New security interests In many instances, the new regime will have little impact at a practical level. Instead of registrations in one of the 70 old registries, a secured party now registers in the PPSR. For example, a finance company taking a mortgage over a motor vehicle used to register in REVS but now registers in the PPSR. A bank that takes a Fixed and Floating Charge over its customer’s assets and undertaking used to register it at ASIC but now registers a General Security Agreement in the PPSR.
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However, the PPSA also deems certain interests which formerly did not require registration to be security interests requiring registration under the PPSA. These new security interests are: • Retention of title clauses: This is where a seller sells goods to a buyer under trading terms which provide that title to the goods will not pass to the buyer until paid for in full. • Commercial consignments: This is where a seller makes goods available to a buyer on the basis that the buyer will only pay for the goods if he can sell them. If he cannot sell the goods, the buyer returns them to the seller without charge. • Long term leases of goods: ‘Long term’ is defined as more than 12 months except in the case of serial goods such as motor vehicles when the period is 90 days. An example would be a finance company that leases office equipment and computers to a customer for three years. Such a lease previously did not require registration in any register but now requires registration in the PPSR.
Transitional arrangements
performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property).’
The essential point is that the PPSA applies to personal property and not real estate. The Act does not affect traditional bank mortgages or charges over land and houses. The Act also does not apply to interests in fixtures (Section 8(1)(j)). However, this brings into play all the fine distinctions that can arise as to whether an item is a fixture or not. These fine distinctions can be illustrated by two examples: Example 1: Assume a seller sells a load of bricks to a builder who intends to use them to build a house. The terms of trade include a retention of title clause and the seller duly registers a financing statement under the PPSR. Shortly after and before the builder has commenced work, the builder goes bankrupt. In these circumstances, the bricks are still goods and the seller’s security interest will prevail over all other competing interests. The seller will be allowed to enter the site and remove the bricks. Example 2:
For a period of two years from commencement of the Act, any of these three security interests that were in force as at that date do not require registration but are afforded the same protection as if they were registered.
Assume the same facts but this time, the builder uses the bricks to build a house and then goes bankrupt. In this example, the bricks are now clearly a fixture and the PPSA no longer applies. Registration in the PPSR is no longer effective and gives the seller no protection. The mortgagee of the land will be allowed to exercise his power of sale and sell the house and land, including the bricks.
However, the transitional protection will be lost if the security interest is not registered before the expiration of the transitional period, i.e. by 30 January 2014 which is fast approaching.
What impact does the PPSA have on landlords?
Scope of the PPSA
The short (and fortunate) answer is not very much. However, it is equally important to know when an Act does not apply as much as when it does.
Because these three security interests are new, the PPSA provides for certain transitional arrangements.
The central provision is Section 12 which defines a ‘security interest’ as: ‘An interest in personal property provided for by a transaction that in substance secures payment or
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Paul Anderson | November 2013
www.turkslegal.com.au Syd | Lvl 44, 2 Park St, NSW 2000 T: 02 8257 5700 | F: 02 9264 5600 Melb | Lvl 10 North Tower, 459 Collins St, VIC 3000 T: 03 8600 5000 | F: 03 8600 5099
Potential issues include the following: • The lease itself of real estate is clearly not caught because it is not an interest in personal property and is not a security interest. • Landlords frequently take security from tenants in the form of bank guarantees or cash deposits. The better view is that neither of these interests require registration under the PPSA although there have to date been no cases on the point. • The area of greatest impact for landlords is likely to be long term leases of goods associated with a lease or premises. The point can be best illustrated by two examples: Example 3: A landlord leases a farm for five years and includes in the lease two valuable pieces of equipment called irrigators. Because the term of the lease is more than 12 months, prima facie the lease of the irrigators requires registration. Example 4: A landlord leases a restaurant to a tenant for three years and includes various items of furniture and valuable kitchen equipment. Again, because the term of the lease is more than 12 months, prima facie the lease of the equipment requires registration. It is true that under Section 13 of the PPSA the lessor must also be regularly engaged in the business of leasing goods. Depending upon the frequency of operations this can raise some difficult questions as to whether a landlord is ‘regularly engaged’ in the business of leasing goods.
Bankruptcy of tenant and interpleader If a tenant goes bankrupt, the landlord may be met with a large number of claims from different people seeking access to the premises and claiming the right to remove furniture and equipment. Examples include the tenant himself, the tenant’s trustee in bankruptcy, finance companies in respect of leased equipment and banks seeking to exercise rights under Fixed and Floating Charges or General Security Agreements. This places the landlord in a difficult position and potentially at risk of litigation between competing claims. In these circumstances the landlord can interplead. This involves filing a summons which is served on the competing parties. After a hearing, the Court will determine the competing claims including costs and this will avoid a potential risk of litigation to the landlord.
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Paul Anderson | November 2013
Conclusion The impact of the PPSA on landlords needs to be kept in perspective. However, the recommendation is that a landlord should register his security interest under the PPSA whenever he enters into a long term lease of personal property in conjunction or association with a lease of premises. Failure to register may result in the lease of personal property being void if the tenant goes into bankruptcy or liquidation with the result that the trustee or liquidator will retain the leased personal property at the expense of the landlord.
For more information, please contact:
In any event, registration under the PPSA is relatively easy and inexpensive. The recommendation is that a landlord should register in the PPSR any long term lease of goods associated with a lease of premises.
Paul Anderson Partner T: 02 8257 5742 M: 0418 491 395 paul.anderson@turkslegal.com.au
Failure to register can result in the lease of personal property being void as against the tenant’s trustee in bankruptcy or liquidator.
www.turkslegal.com.au Syd | Lvl 44, 2 Park St, NSW 2000 T: 02 8257 5700 | F: 02 9264 5600 Melb | Lvl 10 North Tower, 459 Collins St, VIC 3000 T: 03 8600 5000 | F: 03 8600 5099