In this issue:
- Introduction of PPS delayed
- High Court decision may extend ambit of PPSA
- Interpretation of Inter-Creditor Agreement
- Goodridge decision overturned
- Developments in New South Wales retail leases law
- Amendments to Security of Payment legislation in New South Wales
- Tax breaks for green buildings
- Amendments to section 149 planning certificates relating to coastal matters
Introduction of PPS delayed
As you are aware, the introduction of the Personal Property Securities Act 2009 (Cth) (PPSA) has been delayed until October 2011. Although the PPSA relates to the taking of security over personal property (being property other than land, fixtures, water rights and certain statutory licenses), it is still relevant to property financing and project finance generally.
On introduction, documents in the nature of fixed and floating charges (to be identified as general security agreements under the PPSA) will no longer be registered at ASIC. They will be registered on the National PPS Register. Indeed, the ASIC Charges Register will be closed from the commencement of the PPSA.
To the extent that any personal property forms part of the security taken by property/project financiers, it will be necessary to consider what (if any) additional security should be taken and how such security should be perfected under the PPSA to minimise the risk of other financiers, third parties or insolvency practitioners having priority over the security of the property/project financier.
For example, a financier may wish to take security over intellectual property, accounts receivable, specific accounts and other contractual rights. In each case, compliance with the PPSA will be required to perfect the security interest.
Providers of goods on bailment to a property developer (such as the providers of scaffolding and other equipment etc used in construction) may be required to register their bailment arrangements on the PPSA.
Failure to do so will give the developer's financier priority over such items (provided that the developer's financier has registered its security interest over all assets of the developer).
As the PPSA categorises certain types of arrangements involving the retention of title by financiers (such as leasing, bailment and retention of title) as a form of security interest subject to the PPSA, failure to clearly identify all security interests held by a financier and ensure that they are 'perfected' under the PPSA also may have significant adverse consequences to the value of the security taken in respect of a project.
With the deferment of the commencement date, financiers now have additional time to ensure that they are familiar with the PPSA and make sure their security arrangements comply with the PPSA from commencement.
Our PPS team has been involved in the PPS reforms since the release of the original Discussion Papers in 2006 and has prepared numerous updates on these reforms. For more information on these reforms, please view our PPS updates below.
Further PPS Amendment Bill introduced - however issues remain
Security in personal property
Unofficial guide to the PPSA
PPS reform continues to move forward
High Court decision may extend ambit of PPSA
In the recent High Court decision of TEC Desert Pty Ltd v Commissioner of State Revenue, the High Court held that certain assets (previously thought to be fixtures and therefore part of the land in the context of mining operations) were to be regarded as personal property.
The High Court was of the view that due to the interpretation of the Western Australian Mining Act 1978 and that mining tenements are generally regarded as personal property and not an instrument providing for an interest in land, the general law relating to the meaning of 'fixtures' did not apply as the Act contained provisions dealing with the rehabilitation and removal of assets affixed to the land the subject of the relevant mining tenements. To the extent that other statutory licences or leases can be regarded as being personal property rather than creating an estate or interest in land, a similar interpretation may apply to other assets affixed to property the subject of such form of statutory tenure.
The term 'fixtures' is defined in the PPSA as meaning 'goods, other than crops, that are affixed to land'. Presumably, the definition relates to the general meaning of the words 'affixed to land', however the High Court decision indicates that the term 'land' will not necessarily extend to mining tenements or other forms of statutory tenure. On that basis, assets affixed to land the subject of such tenure may be regarded as personal property and therefore, in taking security over such assets, the provisions of the PPSA will need to be considered (rather than relying on a mortgage of the 'relevant land').
Clearly this is a matter that requires clarification and it will have a significant impact on the nature of security taken by financers in respect of such projects.
Goodridge decision overturned
In the context of syndicated lending, the Goodridge decision in February 2010 raised a significant question about whether or not the standard provisions allowing new financiers to become a member of a syndicate (through the use of substitution certificates and the like) were effective. If the decision was not overturned on appeal, significant questions would have arisen about the effectiveness of previous substitutions of lenders in syndicates as well as the process to be adopted going forward.
In late January, the Full Court of the Supreme Court of New South Wales overturned the initial decision, much to the relief of not only financiers in respect of syndicated transactions but also margin lenders.
Subject to any successful appeal to the High Court by Mr Goodridge (who has now applied to the High Court for special leave to appeal), existing transaction documents may continue to be used to give effect to the transfer of the participation of financiers in syndicated loans.
Interpretation of Inter-Creditor Agreement
In a recent decision by the England & Wales Court of Appeal (Civil Division), the Court had to interpret an intercreditor deed to determine whether or not mezzanine financiers were entitled to rely on the technical wording of the document to prevent the release of certain securities held by the security trustee on behalf of both the senior lenders and the mezzanine lenders.
In the case (Barclays Bank PLC & Ors v HHY Luxemburg SARL & Anor (Rev1)), the Court held that if a document is capable of more than one meaning, it is appropriate to adopt the more commercial construction. In determining the appropriate interpretation, the more commercially sensible construction is to be adopted.
Although an English decision, the approach taken may be adopted in Australia when complex inter-credit arrangements require consideration. It is important that the objectives of the inter-creditor arrangements are clearly understood by both parties (and ideally documented prior to the preparation of the formal inter-creditor document) as this will no doubt assist a court determine which of two or more alternative meanings should apply to the document.
Developments in New South Wales Retail Leases Law
New disclosure statement
New requirements for landlord's disclosure statements have been incorporated into the Retail Leases Act 1994 (NSW) (Act). The new form of disclosure statement must be provided for all retail leases entered into on or after 1 January 2011. Under the new regime landlords must provide tenants with a plan of the premises and disclose more extensive information, including the following details:
- structures, fixtures, plant and equipment in the premises
- services and facilities provided by the landlord
- car parking at the building (previously only required if the premises was located in a shopping centre)
- any works planned or known by the landlord to the premises or the building/shopping centre, including any surrounding roads, during the term of the lease (previously only required if the premises was located in a shopping centre)
- for premises in shopping centres - whether the landlord adheres to the Shopping Centre Council of Australia's Casual Mall Licensing Code of Practice, and if so a copy of the Code must be attached.
A tenant may potentially be able to terminate the lease if a landlord does not provide a disclosure statement required under the Act. Financiers will therefore need to ensure that where the security consists of retail property, the borrowers/security providers have issued to their prospective tenants the new form of disclosure statement containing all the required information to eliminate the risk of termination.
Further potential changes to Act
On 10 January 2011, the New South Wales Government released an exposure draft of the Retail Leases Amendment Bill 2011 (Bill). According to the NSW Minister for Small Business, the Bill aims for a 'fairer, transparent and more balanced approach' to retail leasing arrangements in NSW. The Bill proposes various amendments to the Act, including:
Stricter disclosure requirements
In addition to the new disclosure statement already introduced under the Act (summarised above), the Bill proposes stronger transparency by:
- requiring a landlord to give six months' notice to a tenant of any alteration or refurbishment that would adversely impact the tenant's business (currently two months' notice is required)
- enabling a tenant to require a landlord's disclosure statement before exercising an option to renew a lease. Additionally, tenants will only be required to pay outgoings that are disclosed in the disclosure statement.
Under the Bill, landlords will be prohibited from passing on land tax to tenants as recoverable outgoings.
Requirements for alternative premises
When relocating a tenant, a landlord will be required, if practicable, to offer alternative premises of comparable commercial value. If the alternative premises offered by the landlord do not meet the requisite standard and the lease is terminated, then the landlord will be liable to compensate the tenant for the depreciated value of the tenant's fit out of the existing premises.
Termination on grounds of proposed demolition
After a landlord has provided a tenant with a notice of termination due to proposed demolition, under the Bill the tenant cannot be required to make any repairs or improvements to the premises, unless they relate directly to the safety and security of the building.
Refund of unused marketing contributions
A tenant will be entitled to a refund of such proportion of its contributions made towards a landlord's advertising and promotional costs that has not been spent by the end of the term of the lease.
Impact on landlords: a shift of power
The Bill, in its current form, represents a shift in balance of power between retail landlords and tenants. The new requirements proposed under the Bill will clearly be more onerous for landlords by limiting the costs that landlords can recover from tenants and imposing stricter disclosure, notice and registration requirements. It should be noted, however, that at this stage the Bill is only in a draft form. The submissions on the exposure draft were due on 11 February 2011. No doubt that the NSW state election in March 2011 will be a determining factor in seeing if the Bill is enacted, whether in its current form or at all.
Impact on financiers
If the above changes are adopted, the cashflow of landlords as well as the lead time to commence refurbishment/redevelopment of retail premises will be adversely affected. The impact of the Bill will need to be included in feasibilities for retail development projects as well as yearly operating budgets. Financiers' due diligence will also need to be expanded to ensure that appropriate disclosures under the amendments are made to tenants.
Amendments to Security of Payment legislation in New South Wales
The Building and Construction Industry Security of Payment Amendment Act 2010 (NSW) came into force on 28 February 2011, inserting a new Part 3, Division 2A into the Building & Construction Industry Security of Payment Act 1999 (NSW). The amendments are most beneficial to subcontractors, allowing them to require a principal to withhold money owed by them to the head contractor against which the subcontractor commences adjudication proceedings for unpaid monies.
Details of these amendments were set out in our recent update.
From a financier's perspective, the amendments may adversely affect the continuation of a project where the defaulting head contractor's cashflow is such that the withholding of amounts by the principal inhibits the defaulting head contractor from continuing to carry out the balance of its work on the project. In that situation, the principal may be called upon to fund such work.
Depending upon whether the principal (if not the head contractor) or the head contractor are able to provide such additional funding, delays to the project may be incurred until these funding issues are resolved.
Clearly, any disruption to the project as a result of the operation of the amendments will have a negative impact both on the principal of the project and its financier. It will be necessary to ensure that there is sufficient contingency built into project budgets to cover not only unforeseen delays and variations but also the possible negative impact flowing from the amendments.
In addition, financiers may wish to impose strict payment verification requirements at the subcontractor level so as to ensure they become aware of any default in payment by the defaulting head contractor to the subcontractor. Finance documents may require amendment so as to impose a notification requirement on the principal to advise the financier if the principal receives any payment withholding request issued by a subcontractor under the new provisions.
Tax breaks for green buildings
In the recent consultation paper released by the Federal Government, the Treasury outlined its proposed tax break for costs associated with improving the energy efficiency of existing commercial office buildings, shopping centres and hotels covered by the National Australian Building Environment Rating System (NABERS). The scheme aims to increase the benefits arising from energy efficient retrofits.
The scheme proposes a one-off bonus tax deduction of 50% of the costs of eligible improvements. This tax deduction is in addition to the normal capital allowance deduction, enabling 150% of the total value to be deducted over their life and providing a significant cashflow benefit to owners upgrading their properties.
The scheme is due to commence on 1 July 2011 and run until 30 June 2015, with $1 billion allocated for its life. The scheme requires the building owner to comply with a number of approvals and reporting obligations. Details of this were contained in our recent update.
Impact on financiers
If the scheme is implemented, the cashflow benefits may very well be factored into project budgets. The timing of the availability of the tax deduction will be governed by when the relevant certificate is issued by the Department of Climate Change & Energy Efficiency confirming eligibility of the project for the tax bonus.
Generally, this will only occur upon completion of the works and if the works are necessary to lift the NABERS rating by at least 2 stars to achieve a minimum of 4 star rating. This would normally occur at the end of the project, and consequently there does not appear to be much scope for the amount of funding required for the projects to be reduced (by the amount of the tax deduction). In addition, in respect of special purpose projects, there will be no income against which the tax deduction will be able to be claimed until after the sale of a significant part of the project.
Nonetheless, in respect of facilities that are secured by property in addition to that on which the retrofit is to occur and where the owner is in receipt of income from such other property or other sources, there may be some advantage in factoring the benefits arising from the additional tax deduction on offer into the project's budget.
In any event, financiers will need to make sure that any borrowers or security providers that have offered as security commercial office buildings of greater than 2,000m˛ comply with their disclosure requirements under the Building Energy Efficiency Disclosure Act so as to avoid the serious penalties that may be imposed in the absence of adequate disclosure. Once again, appropriate compliance obligations should be imposed on borrowers and security providers in this regard.
Amendments to section 149 Planning Certificates relating to coastal matters
Where a project relates to property located within certain coastal council areas, financiers can now obtain greater information as to whether the properties are subject to a coastal protection service charge and/or coastal hazards associated with projected sea level rises.
From 25 February 2011, amendments to Schedule 4 of the Environmental Planning & Assessment Regulation 2000 require section 149 certificates to include certain information. The changes apply not only to the coastal zone but also extend to council land that adjoins the tidal waters of the Hawkesbury River, Sydney Harbour and Botany Bay and their tributaries. This information may include:
- whether an order has been made under Part 4D of the Coastal Protection Act 1979 in relation to emergency coastal protection works on the land (or on public land adjacent to the land)
- whether the council has been notified under section 55X of the Coastal Protection Act 1979 that emergency coastal protection works had been placed on the land (or on public land adjacent to that land)
- whether the owner (or any previous owner) of the land has consented to the land being subject to annual charges under section 496B of the Local Government Act 1993 for coastal protection services
- the inclusion of a statement of the risk category of the land and whether the land is subject to coastal erosion, tidal inundation or coastal flooding.
Project financiers involved with developments in the relevant council areas will need to ensure that their due diligence includes verifying that the section 149 certificate deals with these matters. A purchaser may be able to rescind the sale contract if the vendor has failed to comply with its statutory disclosure obligations. In addition, the potential impact of projected sea level rises will have a major impact on the costs associated with any developments affected by such risk.
We hope the above summary of recent developments is of assistance to you. Should you wish to discuss any of the above matters, please do not hesitate to contact one of our Finance & Projects team members.
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This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.