Key legislative changes and PPS case law

The definition of a ‘PPS lease’ has changed twice since the introduction of the PPS Act - once on 1 October 2015 and again on 20 May 2017. For general information about PPS Leases, see Leases, bailments and consignments.

Summary

For for leases or bailments entered into on or after 20 May 2017), a ‘PPS lease’ is a lease or bailment where the agreement to lease or bail the property is for:

• a set term(s) of more than two years (including options to renew)
• an indefinite period but not until the lessee’s or bailee’s possession extends for more than two years

For leases and bailments entered into before 20 May 2017), a ‘PPS lease’ is a lease or bailment where the agreement to lease or bail the property is for:

• a set term(s) of more than one year (including options to renew);
• an indefinite term
• a term of up to one year or an indefinite term where, with the consent of the lessor or bailor, the lessee or bailee continues to retain substantially uninterrupted possession of the property.

The rules for leases of serial numbered goods (such as motor vehicles, aircraft, and watercraft) changed on 1 October 2015. As a result, leases and bailments for serial numbered goods entered into:

• on or after 20 May 2017 are PPS leases if they have a fixed term of two or more years
• on or after 1 October 2015 but before 20 May 2017 are PPS leases if they have a fixed term between 90 days and one year
• before 1 October 2015 are PPS leases if they have a fixed term of 90 days or more.

Background

The Personal Property Securities Amendment (PPS Leases) Act 2017 commenced on 20 May 2017. It extends the period that leases and bailments need to have before they will be PPS Leases under the PPS Act.

When did this change come into effect?

The change came into effect on 20 May 2017.

This means leases and bailments that were entered into after 20 May 2017 will be subject to the new PPS lease definition.

What are the changes?

The minimum duration of PPS leases has been extended from more than one year, to more than two years.

Leases of an indefinite term will not be deemed to be PPS leases unless and until they 'run' for a period of more than two years.

Important Note: This change does not affect agreements entered into prior to the 20 May 2017.

There are instances where a lease might still meet the general definition of a security interest (section 12 PPSA) even if it is not a PPS Lease, so you should seek professional advice if these changes could impact your business.

What does this mean for fixed term PPS Leases entered into after Commencement?

The changes mean that those who enter into leases (and bailments) for two years or less (including applicable options to renew) will no longer need to register as the agreement is no longer considered a PPS Lease.

If your agreement is entered into after Commencement and is for more than two years it would be considered a PPS Lease and should be registered. However, if your agreement is for two years or less, but exceeds the agreed term, it will become a PPS Lease when it extends beyond two years and should be registered at that time.

What does this mean for indefinite term PPS Leases entered into after commencement?

Leases and bailments of an indefinite term will not be PPS leases until they have ‘run’ for a period of more than two years.

For example, if a machine is leased for an ‘indefinite term’ under a lease entered into after the changes and is returned to the lessor after 20 months, the machine was never the subject of a PPS Lease. If it was returned after 30 months it would have been.

In the example where the lessee possessed the machine for 20 months, assuming the general definition of security interest does not apply to the arrangement (it might if the lease was a short term financing lease for example), the PPS Act does not apply to the lease arrangement.

When do I register my indefinite term PPS Lease?

Leases (and bailments) of an indefinite term may be registered at a time when a lessor has reasonable grounds to believe that an indefinite term lease will exceed a two year period. This may be at a time prior to the lease being entered into or as the lease approaches the two year period.

PPSR registrations that provide Purchase Money Security Interest (PMSI) priority need to be made in accordance with strict timelines, they often need to be made before a lessee (or other grantor) obtains possession. For an indefinite term lease, the lessee will often have had possession for an extended period when it becomes clear that the lease will extend for more than two years. The Samwise case ^[1] clarified that a period of possession prior to a security interest arising does not count for PMSI priority registration timelines.

A PMSI priority can be achieved for leases that continue beyond two years by registering as if the first two years of possession did not count under the PPS Act for PMSI priority. This would involve a lessor making a registration in the last months of the second year or the first days of the third year of a lease (depending on the nature of the agreement) to obtain PMSI priority.

The report on the Review of the PPS Act makes recommendations about the clarification of registration timeframes in connection with PMSI priority and on other issues. The Government is working towards addressing these issues in its response to the report.

[1] Samwise Holdings Pty Ltd v Allied Distribution Finance Pty Ltd [2018] SASCFC 95

My lease agreement was entered into before 20 May 2017. What does this mean for me?

The changes only apply to leases and bailments entered into after the change came into effect.

For arrangements entered into prior the changes, a ‘PPS lease’ is a lease or bailment that is regarded as creating a security interest in the property leased or bailed when the arrangement is for:

• an indefinite period; or
• a term or terms of one year or more

However, an agreement for shorter periods will be a PPS lease where the lessee or bailee continues to retain substantially uninterrupted possession of the property with the lessor’s or bailor’s consent after one year.

What does this mean for existing PPS Lease arrangements?

The changes only apply to leases and bailments entered into after the changes commenced.

For leases and bailments entered into prior to the changes, the law remains unchanged and registrations should proceed for these leases and bailments as usual.

Do I need to amend my existing registrations for leases (or bailment) entered into before the changes?

No. The amendments only apply to leases or bailments of goods entered into after this change came into effect.

Should I seek professional advice?

The PPSR is an important risk management tool for business, so you should seek professional advice if these changes could impact your business.

From 30 January 2012, the Personal Properties Securities Act 2009 (Cth) (the PPS Act) established a new system for the creation, priority and enforcement of security interests in personal property, which is generally all property other than land, fixtures and certain statutory interests. The PPS Act generally applies to security interests in goods provided that the goods are located in Australia, or the grantor of the security interest is an Australian entity. The centrepiece of the PPS Act is the creation of a national Personal Property Securities Register (PPSR) on which security interests in personal property may be registered.

Importantly, the PPS Act widens the concept of what constitutes a ‘security interest’. In addition to covering more familiar concepts such as mortgages, charges and pledges, a ‘security interest’ can include interests created by finance leases, hire purchase arrangements and long-term operating leases.

It is important to note that while arrangements may be variously described as leases, hire or rental agreements, the arrangements will be regarded as creating security interests if they meet its legal definition.

As a consequence of PPS reform, members of the hire and rental industry need to consider whether existing practices give rise to security interests in the property hired or leased and whether the security interests should be registered on the PPSR.

This fact sheet should be read in conjunction with Registering on the PPSR to get a greater understanding of the issues.

How are leasing arrangements treated under the PPS Act?

The PPS Act regards finance leases and hire purchase agreements as creating security interests under the PPS Act, because they effectively use property to secure payment.

The PPS Act also treats long-term lease arrangements, known as ‘PPS leases’, as creating security interests in the property leased. For leases entered into on or after 20 May 2017, a PPS lease will include those entered into for:

• a set term(s) of more than two years; or
• an indefinite period but not until the lessee’s or bailee’s possession extends for more than two years

For more information about leases and bailments entered into prior to 20 May 2017, see PPS Lease change 2017.

The reason for this is so that a third party, such as buyer or potential lender cannot wrongly assume that the person who has possession of the goods has a right to sell or offer the goods as security.

Although the PPS Act does not apply to a short term lease of goods, a PPS lease will arise where the lessee continues to retain possession of the property with the lessor’s consent after one year.

Why register leases on the PPSR?

The PPS Act does not generally consider the identity of the owner of the property subject to a security interest when determining priority between two or more security interests in the same property. For example, the lessor’s ownership of the property will not determine who may have priority - it will be the priority rules in the PPS Act.

Although registration is not compulsory, the PPS Act generally requires the registration of security interests in order for priority to be maximised. The general rule is that a registered security interest will have priority over an unregistered security interest regardless of when it was created and whether there was knowledge of the existence of the earlier interest.

Also, if a secured party, such as a lessor, fails to register their security interest, they could lose the property in the event of the bankruptcy or liquidation of the lessee. A secured party could also lose their interest in the property if the security interest is unregistered and the property is subsequently sold or leased. In the case of serial-numbered goods, a failure to register by serial number may also result in the loss of a security interest in the property.

It is important to note that the PPSR is a notice board of security interests and not a register of agreements. Accordingly, a single registration may cover a number of agreements where the hirer/lessee is the same person or business entity.

As already noted, provided the goods are returned at the end of the arrangement, the PPS Act will not apply if serial‑numbered goods are hired out:

• for arrangements entered into on or after 20 May 2017, for a maximum period of less than two years; or
• for arrangements entered before 20 May 2017, for a maximum period of less than one year.

The PPS Act with also apply if:

• the hire period is for an indefinite period but not until the lessee’s or bailee’s possession extends for more than two years where the arrangement was entered into on or after 20 May 2017.
• the hire period is for an indefinite period where the agreement was entered into before 20 May 2017.

What goods are registered by serial number on the PPS Register?

Although many goods are marked by a manufacturer’s number or other serial number, the only goods that may or must be registered by serial number on the PPSR are motor vehicles, watercraft and aircraft. Motor vehicles and watercraft when held as consumer property must be described by serial number; when held as commercial property, registration by serial number is not mandatory.

Aircraft, whether held as consumer or commercial property, must always be described by serial number. The Personal Property Securities Regulations 2010 sets out the serial numbers to be included in a registration on the PPSR.

It is important to note that, regardless of whether inclusion of a serial number is mandatory or optional, a failure to include the serial number in a registration may result in the property subsequently being leased or sold free of the security interest. A failure to include a serial number where it is mandatory will result in the registration being ineffective.

Items hired out to customers that are not able to be registered by serial number; for example, generators or compressors; will require the grantor’s (i.e. the customer’s) details to be included on the PPSR.

What should you do to be prepared for PPS reform?

Some suggestions include:

• Identify transactions that create security interests requiring registrations on the PPSR.
• Reviewing the hire terms on agreements and other documentation to ensure that they take into account the application of the PPS Act.
• Amend your policies and procedures relevant to your business to take into account the new PPS reform.

PPS transitional provisions

For more information on the PPS transitional provisions including transitional security interests and migrated registrations please see:

• Finding and claiming your migrated PPSR registrations
• Migrated security interests

Professional advice recommended

PPS could affect you or your business in a number of different ways. You should seek professional advice in relation to your specific circumstances.

Starting on 1 July 2014, the range of property within the definition of motor vehicle, for the purposes of the Personal Property Securities Act 2009 (PPSA) will be reduced. This change is intended to reduce the costs of working with the PPS Act and the Personal Property Securities Register (PPSR) for small and medium hire businesses by reducing the number of leases of equipment that will involve the making of registrations on the PPSR by serial number.

This information should be read with the information in Registering on the PPSR.

What has changed? What is the new definition?

For the most common types of ‘motor vehicles’, such as trucks, cars and motor bikes, the changes have no significant implications. Cars, vans, utes, trucks and motor bikes will generally be well within the scope of the definition of motor vehicle both before and after the definition changes.

However, starting on 1 July 2014, an amendment to sub-regulation 1.7(2) of the Personal Property Securities Regulations 2010 will narrow the definition of motor vehicle for the purposes of the PPS Act. The definition will apply to security interests (including PPS Leases) entered into on or after 1 July 2014. This will normally include, for example, leases entered into on or after 1 July 2014 even if they involve terms established under an earlier general agreement with a lessor.

Property is a motor vehicle under the PPS Act if it is built to be propelled wholly on land by a motor that forms part of it (but not if it runs on rails, tram lines or other fixed path), has a unique serial number and:

• up to the end of 30 June 2014 (the old definition) is also capable of travelling at more than 10km/hr OR has a total motor power greater than 200W.
• starting on 1 July 2014 (the new definition) the property is also capable of travelling at more than 10km/hr AND has a total motor power greater than 200W.

Regulation 1.7(3) will not change, so some types of property with a serial number and wheels that are built to be towed at more than 10km/h will still be a motor vehicle. Examples include caravans and trailers.

Existing registrations can be maintained to cover security interests created before the changes.

If security interests (including PPS Leases) are created on or after 1 July 2014 over property that is no longer a motor vehicle because of the new definition, a registration over the ‘Other Goods’ collateral class to cover these security interests may be prudent. This means that if a person regularly leases property (on terms that create a security interest) that is within the old definition but not within the new definition, an existing registration over ‘motor vehicles’ may need to be supplemented with a further registration against their customer over ‘Other Goods’. This ‘Other Goods’ registration could then cover leases of property that is no longer a ‘motor vehicle’ starting on 1 July 2014.

People who have security interests in the types of property that may be affected by the changes should consider a review of the power and speed capability of the equipment to see if it will still be regarded as a ‘motor vehicle’ after 1 July 2014. For example, elevating work platforms, some asphalt pavers, dozers, pipelayers and motorised shovels that are currently regarded as motor vehicles might not be motor vehicles from 1 July, depending on their maximum speed and power. As mentioned, an ‘Other Goods’ registration may be needed, in addition to a registration covering motor vehicles, for leases entered into on or after 1 July.

Searching for a security interest in property - do I need to do anything differently after the change?

For property that was covered by the old definition but is not covered by the new definition, searchers should be mindful that registrations might exist both by serial number or by ‘motor vehicle’ under the old definition, and by ‘Other Goods’ or ‘AllPAP’ under the new definition. As a result, unless the speed and power of the relevant item clearly shows that it is and was within the definition of motor vehicle, both a serial number and Grantor search may be prudent for this reason from 1 July 2014.

Professional advice recommended

Personal property securities and, in particular, the narrowing of the definition of “motor vehicle” could affect you or your business in a number of different ways. Consider seeking professional advice in relation to your specific circumstances.

The Australian Government’s personal property securities (PPS) reform is changing the law and practice for secured financing involving personal property.

If you are a pawnbroker or a second-hand dealer you need to know that some parts of your business will be unaffected by the national law reform that will commence in early 2012. The reforms will not apply where a pawnbroker takes a security interest over personal property to secure a loan of $5000 or less and the market value of the personal property does not exceed $5000. This fact sheet will refer to this as the exemption provision.

However, you also need to know that the new law will apply to you if you take a security interest (including a pledge) over:

• A motor vehicle or boat/watercraft of any value providing it has an identification number, or
• Any property where the security or market value of the goods is more than $5000.

PPS reform

In 2009, the Commonwealth Parliament passed the Personal Property Securities Act 2009 (the PPS Act).

The PPS Act sets out rules relating to the priority and enforcement of security interests in personal property and creates a new national PPS Register on which security interests in personal property can be recorded.

What is personal property?

Personal property is property other than land or buildings. It includes physical goods such as works of art, household items and furniture, electrical goods, jewellery, cars, trailers and boats, machinery and crops, as well as intangible property (for example, rights under a contract).

What are security interests?

Generally, a secured creditor takes a security interest to enforce its rights against particular items of collateral in case the debtor defaults on the obligation. If the debtor is declared bankrupt, a secured creditor takes precedence over unsecured creditor in the distribution of the property of the debtor who is declared bankrupt.

Under the PPS Act, a creditor would be considered to be a secured creditor if they had met certain requirements, which will generally include registering their security interest on the PPS Register.

What does PPS reform mean for me?

From early 2012, the PPS Register will be the authoritative record of registered security interests in all types of personal property,

It is not compulsory to register security interests in personal property on the PPS Register; however, registering an interest in personal property is a key way to ensure priority of the interest. Priority, as used in the PPS Act, refers to the order of precedence for determining which creditor has the right to be paid first in the case of the default or bankruptcy of the debtor.

Pawnbrokers

It will be a business decision whether a pawnbroker chooses to search the PPS Register before accepting personal property as security for a loan. You should seek advice from a business advisor to be sure about this.

Generally pawnbrokers are unlikely to need to use the PPS Register if they only provide loans of less than $5000 in return for pledged goods, because of the exemption provision in the PPS Act. However, pawnbrokers should also be aware of PPS implications and may need to use the PPS Register if they accept more valuable goods, such as a car or boat, as pawned goods.

Second-hand dealers

Second-hand dealers may be affected to varying degrees by PPS reform. A dealer may come within the scope of the PPS Act if a dealer sells personal property on terms that extend credit to a customer (such as retention of title arrangements, discussed below) or because a dealer wants to know if the property they wish to purchase is encumbered. Note that the exemption provision does not apply to second hand dealers.

Retention of title

Sometimes property is sold or leased on the basis that the purchaser takes the property but legal ownership, or title, to the property, remains with the seller until the financial arrangement is concluded. Under the PPS Act these types of arrangements create a security interest in the property sold or leased. As a result, a seller’s (or lessor’s) rights in the property may be at risk if the security interest is not registered on the PPS Register. The terms of supply agreements and leases may need to be reviewed by business owners or their business advisors to determine whether they come under the PPS Act.

Buying personal property

In certain circumstances, the PPS Act provides that a buyer of property will take it free of any security interest; that is, it is unencumbered. For example, where the property is purchased for personal, domestic or household purposes and its market value is $5000 or less.

In regard to motor vehicles and watercraft which must be registered by serial number, a failure to register by the relevant serial number may result in a purchaser taking the property free of any security interests in that property. In this way, the PPS Register will operate in a similar way to state and territory based vehicle security interest registers, such as REVS and VSR.

List of legislation governing pawnbrokers and second-hand dealers around Australia

• NSW: Pawn Brokers and Second-hand Dealers Act 1996
• Vic: Second-Hand Dealers and Pawnbrokers Act 1989
• Qld: Second-hand Dealers and Pawnbrokers Act 2003
• WA: Pawnbrokers and Second-hand Dealers Act 1994
• SA: Second-hand Dealers and Pawnbrokers Act 1996
• Tas: Second-Hand Dealers and Pawnbrokers Act 1994
• ACT: Pawnbrokers Act 1902 and the Second-hand Dealers Act 1906
• NT: Consumer Affairs and Fair Trading Act

Professional advice recommended

Personal Property Securities could affect you or your business in a number of different ways.

You should seek professional advice in relation to your specific circumstances.

International examples

The PPS Act was drafted so that it was generally consistent with the comparable legislation overseas on which it was modelled. Accordingly, judicial decisions in those jurisdictions offer a guide as to how the PPS Act may be interpreted by Australian courts.

Example of a bailment that was not a PPS lease under New Zealand law.

Rabobank New Zealand Limited v McAnulty [2011] NSCA 212

A horse was bailed by its owners to a commercial stud farm which was paid by the owners to provide services, such as managing the servicing of mares by the stallion, the collection of fees on their behalf, and generally providing for the horse’s care. A bank later registered a security interest over the stud farm’s property in exchange for finance. When the stud farm defaulted, the bank claimed an interest in the horse ahead of the owners because they had failed to register a security interest arising from the bailment of the horse.

However, the court found that the bailment, although exceeding one year, did not constitute the New Zealand equivalent of a PPS lease and the priority rules in the NZ PPS Act did not apply. Rather, it found that the owners of the horse were not in the business of bailing goods, but were rather in the business of maintaining and profiting from the stallion. To be in the business of bailing goods, an owner would have to receive, or intend to receive, payment, or some other form of value, with a view to making a profit from the bailment.

By contrast, in this case the bailee obtained possession of the horse, but did not pay for that possession; rather, the bailee was paid by the bailor to carry out services in relation to the horse. Therefore, it could not be said that the owner profited, or intended to profit, from the bailment. In deciding that this scenario was not caught by the NZ PPS Act, the court also commented that it considered the wording of the Australian PPS Act was clearer in excluding these arrangements from the definition of a PPS lease.