The new Personal Property Securities Act and its implications for dealings associated with Land
Certain aspects of real estate transactions may be caught by the new personal properties securities regime despite the Personal Property Securities Act 2009 (Cth) expressly excluding dealings in land, fixtures or 'real property'.
The Personal Property Securities Act 2009 (Cth) (PPS Act) was passed on 14 December 2009. After stakeholder consultation and online register development and testing, it is slated to commence in October 2011. The national regime will replace the various laws and registers that currently operate in all States and Territories, with the key 'drivers' of the PPS Act being legislative harmonisation, to provide a streamlined and consistent process for the Protection of Security interest in personal property.
The extent of the application of the PPS Act to land is unclear. The words 'personal property' seems to exclude 'real' property by definition in the title. The PPS Act expressly excludes land (i.e. 'real property' in the legal sense including both freehold and leasehold interests), fixtures, water rights, some statutory licences and some other miscellaneous interests. Despite these exclusions, transactions involving security interests in land, may be impacted upon by the new regime due to the way those transactions are handled. It is therefore important that property owners and secured parties alike, understand and are prepared for the implementation of the new regime.
Land an express exclusion – but to what extent?
Current laws dealing with the registration of security interests in a proprietary interest, such as mortgages and caveats in each jurisdiction, still apply. However, whilst the PPS Act expressly excludes the "...creation or transfer of any interest in land..."1iincluding any interests in fixturesii, many aspects of commercial property transactions and dealings in agricultural interests may still be caught by the new regime. The personal properties securities regime may impact upon dealings in, and relates to 'real property' in two broad areas:
- impacting on existing 'traditional' financing arrangements whereby interests in or connected to commercial transactions in real property are currently secured (or would be subject to similar security in the future) including fixed and floating charges, crop mortgages, goods mortgages, bills of sale; and
- capturing a broader ambit of dealings which in substance, create a 'security interest' in, or rights in connection with, or related to, real property (including securing landlord ownership rights in premises fit-out, equipment leasing, protecting certain contractual 'step-in' rights etc).
Before considering these two areas, we highlight the key concepts associated with the protection of personal property under the new personal properties securities regime below.
Key concepts in the Personal Property Securities Act 2009
The PPS Act covers all 'personal property'. 'Personal property' is broadly defined and includes both tangible and intangible property such as inventory, stock in trade, goods of all kinds, crops and livestock, intellectual property, marketable securities, investment instruments and accounts, and contractual rights. As noted previously, specific exclusions from the legislation include interests in land and fixtures, water rights and other are as prescribed by the regulations.
A 'security interest' is broadly defined as an interest that secures payment of money or performance of an obligation3[iii]. It is this broad definition that expands the ambit of security interests captured by the PPS regime including interests which, in 'substance' create a security interest such as commercial arrangements like retention of title, consignment and bailment arrangements.
The PPS Act:
- establishes a regime for protecting 'security interests' in respect of personal property and the priorities between competing security interests in the same personal property;
- provides for the establishment of a national online register, operated by the Insolvency and Trustee Service Australia (ITSA), for the registration of all security interests in personal property (thereby consolidating over 40 distinct registers that currently exist nationwide);
specifies that a security interest cannot be enforced:
- against the grantor until it has 'attached' to the relevant property (evidenced by an intention to create a security interest or the occurrence of some other act to create the security interest i.e. entry into a written security agreement); and
- against a third party (e.g. another security holder) or in an insolvency situation where there are competing interests in the same collateral, unless it is both attached and 'perfected'. 'Perfected' means registration of the security interest on the new PPS Register.
Fixed and floating charges will be replaced by General Security Agreements
In many development project or commercial property acquisitions, financiers typically take a fixed and floating charge over various assets of the developer, in addition to a mortgage over the land itself as part of its security package. These assets may include interests in pre-sale contracts, leasing pre-commitments and deposits, contractual rights in connection with construction contracts, and intellectual property rights in connection with designs and project approvals. Although proprietary interests in land and fixtures are excluded under the PPS Act, other interests in these types of assets are covered by the PPS Act and therefore, will still need to be properly protected under the new regime.
Under the PPS Act, the concept of fixed and floating charges as we know them will disappear (with the relevant amendments being made to the Corporations Act). In its place, parties will enter into 'general security agreements' over a grantor's present and 'after-acquired' property. The security interest granted under a general security agreement is identified as being attached to specified classes of collateral (including commercial property, financial property, motor vehicles, intangible property etc). There is no ongoing relevance for 'fixed' and 'floating' where security interests are attached and fixed to collateral classes which of themselves, may capture 'circulating assets' such as inventory.
As with current practice, the terms of the general security agreement will continue to specify the nature of restrictions on a grantor using the 'charged collateral'.
It will be necessary to register the security interest granted, under a form of general security agreement on the PPS Register in order to protect the security interest. Furthermore, in order to preserve the highest priority against competing interests in the same collateral classes, it will be necessary to register this interest as soon as possible (it is relevant to note that the PPS Act enables a security interest to be registered as soon as a party has reasonable grounds to believe it will be granted a security interest). Accordingly, registration can and should occur as soon as the grantor agrees to grant the interest – which can be some time before settlement / financial close occurs. Unlike the current practice, where fixed and floating charges are registered at or after settlement, it is expected that it will become market practice to register the security interests on the PPS Register as soon as a financing offer is accepted in principal.
In addition, other security interests, such as goods mortgages and bills of sale in connection with personal property which have up until now been registered on a general deeds register at the relevant Department of Lands, will, on the commence of the PPS Act, require registration on the PPS Register to protect these security interests against third parties and in an insolvency situation.
Many commercial arrangements 'in substance' create a security interest
As a result of the PPS Act's approach to 'in substance' rather than form, the creation of security interests, in a number of commercial arrangements will now be captured. These arrangements include Retention of title arrangements, hire purchase and lease finance arrangements and bailment agreements. The PPS Act introduces a new concept called a "purchase money security interest" (PMSI). PMSI is a form of security interest created where, for example:
- a secured party provides the specific collateral or provides money to enable a grantor to acquire specific collateral; or
- the interest of a lessor or bailor under a PPS Lease[iv]; or
- the interest of a consignor under a commercial consignment where the consignor retains 'title' or security in the consigned goods pending full repayment of the supply.
In considering the potential implications for dealings in, or associated with, an interest in real property and fixtures, it is relevant to note the following areas which may be impacted:
- fitout incentives provided by landlords – usually the ownership of a fitout would remain with the landlord until the expiry of the lease or a period of time in which the incentive is amortised. Such arrangements are akin to retention of title arrangements – however, under the new PPS regime such contractual rights will not be recognised nor protected in an insolvency situation or circumstances where there are competing parties with interests in the assets of the lessee. Accordingly, landlords will need to register its interest in the fitout (to the extent that the fitout is not fixtures (which cannot be protected under the PPS Act)) on the PPS register;
- agricultural PMSI's – the PPS Acts specifically provides for an agricultural PMSI[v] whereby a secured party who provides value which allows crops to be grown or livestock to be fed, can obtain the benefit of a 'super priority' that may defeat all other security interests in the crops / livestock and resultant proceeds;
- contractual provisions – standard contractual provisions in joint venture agreements and shareholders agreements, such as step-in rights or dilution on default clauses, may constitute a security interest giving a party rights in collateral such as the benefit to step into contractual arrangements regarding the development of a property, the ability to procure the transfer of shares in a company or to exercise pre-emptive buy-out rights etc. Such rights, to the extent a security interest is created in substance, would need to be registered in order to be protected against competing interests in the same collateral.
Given the broader ambit of 'security interests' capturing a number of contractual arrangements which have not previously required registration in order to be protected and enforceable against third parties (and in an insolvency situation), it is important for parties to review their commercial arrangements and consider whether, in substance, a security interest in personal property is being (or has been) created.
Enforcement of 'mixed securities' including land
The PPS Act recognises that land is often dealt with in conjunction with other assets that are covered by the new regime, and offers a novel approach to enforcing security over this 'package' of assets. The PPS Act allows a security holder to elect to enforce the security interest by applying the enforcement laws that apply to land in the relevant state or territory, to the whole 'security package' including those assets that would otherwise be covered by the enforcement regime under the PPS Act[vi].
Accordingly, a security holder could, for example, deal with land and other assets of a business operated on the land (and which would traditionally be the subject of a fixed and floating charge) together, as a mortgagee in possession, under the relevant 'land law' of the relevant jurisdiction.
However the election can only be made if it is reasonable to do so in the circumstances, taking into account a number of matters, including the respective values of the land and other assets, the degree of connection between the land and the other assets, and whether it is an efficient method of enforcement to deal with them together. As can be seen, the intention is to allow this approach only where it is practical and efficient to do so in all the circumstances.
All existing security interests created prior to the commencement of the PPS regime (to be in October this year) and registered on one of the numerous registers currently in existence, will be migrated to the PPS Register before commencement. Such transitioned security interest(s) will be 'temporarily perfected' for a transitional period of 24 months, at which time if such interests have not been re-perfected (updated with relevant collateral classes etc), such security interests will be removed from the PPS Register at the end of the transitional period. Those security interests which are newly captured under the PPS regime (including PMSIs) need to be registered as soon as possible after the commencement of the new regime to ensure such security interests are perfected and to create the super priority status and protection in an insolvency situation.
How we can help
Holding Redlich has a team of legal professionals across our practice groups who can assist your business in determining the impact of the PPS regime on your operations and can offer:
- strategic advice on implications of the new regime on specific Partner industry groups;
- a review of standard terms and conditions and update to incorporate PPS enabling and transitional clauses (including update ROT terms);
- assist in re-perfecting existing and transitioned security interests (such as migrated fixed and floating charges from the ASIC register);
- provide a tailored form of general security agreement for traditional financing arrangements (in place of fixed and floating charge instruments);
- provide your staff with focused training on the new regime and PPS FAQ's for internal staff use.
[i] Section 8(1)(f)(l) of the Personal Properties Securities Act 2009 (Cth).
[ii] Section 8(1)(j) of the Personal Properties Securities Act 2009 (Cth).
[iii] See section 12 of the Personal Properties Securities Act 2009 (Cth).7
[iv] A PPS Lease is defined in section 13 of the Personal Properties Securities Act 2009 (Cth).
[v] See Part 3.2 of the Personal Properties Securities Act 2009 (Cth).
[vi] See Part 4.2 of the Personal Properties Securities Act 2009 (Cth).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.