Australia: Landlord and Tenant Alert: Does the PPSA impact on leasing transactions?

The deadline has come and gone and banks, financial institutions and insolvency practitioners are now immersed in bringing themselves up to speed with the implementation and implications of the Personal Property Securities Act 2009 (PPSA). Landlords and tenants would be forgiven for taking the view that they do not need to concern themselves with the new arrangements. After all, the answer is in the title of the legislation. It relates to personal property, not real property.

However, given that there has been a wholesale change to the legislative regime across Australia, it would be remiss of those dealing with leases on a daily basis not to have a cursory understanding of the PPSA.

Essentially the PPSA creates a national register for personal property whereby those parties with an interest in the property can register their security. As with the real property register maintained by Department of Lands, registration and timing is critical. The PPSA establishes an order of priority of interests based on registration timing, perfection and priorities.

Pertinent for landlords and tenants, the legislation has specific exclusions along the following lines:

• PPSA does not apply to the creation or transfer of an interest in land
• PPSA does not apply to an interest in a fixture
• a lien, charge or any other interest in personal property that is created or arises at general law (such as landlord's lien) is not affected by the operation of the PPSA.

Some common points that landlord and tenants have raised in relation to the new legislation are:

Fitout / incentive deeds

It is unclear as to the extent to which PPSA may have an impact on an arrangement whereby a landlord advances an incentive amount to a tenant for fitout of the tenancy. There may be a discrepancy between the definition of "fixture" at general law and the definition in the PPSA, and this may lead to complications in the application of the PPSA exemption relating to "an interest in a fixture".

The parties to a fitout deed should carefully consider issues of ownership relating to all items of fitout. Regardless of whether they are percieved as "fixtures" or not, clearly defining ownership should assist with clarifying the PPSA position. Where the fitout is paid for by the landlord and is landlord's property, no party who lodges a general interest on the register in relation to the tenant's property should be able to defeat the landlord's absolute claim to ownership of that specific fitout.

Point to note: To protect their position, landlords should be careful to draft the fitout documentation to set out which items of fitout are owned by the landlord, and they should always insist on receiving a comprehensive depreciation schedule or asset register as evidence of exactly what is owned by the landlord.

Right of entry

In a situation where a financier advances funds to a tenant in return for a charge over assets, again the PPSA is not likely to change the position so far as landlords and tenants are concerned. Certainly the process will change, in that the financier will need to register its interest on the PPSA register. But that will not grant the financier an absolute right to enter the tenancy to exercise any rights it may have over the assets. A financier will still need to obtain a 'right of entry waiver' from a landlord so that, in the event that it takes steps to enforce its security, it will have a right to enter into the tenancy to recover the assets.

Point to note: Registering a security interest on the PPSA will not grant a financier entry rights against a landlord without a right of entry wavier. However, landlords should be extra vigilant in checking exactly what is included in the list of charged assets in any right of entry document. If the list includes items which the landlord considers fixtures or items that the landlord has paid for under some incentive/fitout arrangement, then the granting of rights to a financier could create some ambiguity or a priority dispute if the financier perfects its interest through registration under the PPSA.

Termination of lease / Abandonment of tenant's goods

Should a tenant vacate a tenancy and leave goods behind, either as a result of a re-entry by the landlord or by abandonment, the PPSA register may actually assist a landlord. As noted above, the exceptions to the PPSA should preserve any rights that the landlord may otherwise have had under the lease documents or at general law. But when it comes to chattels and other loose items that the landlord may not necessarily have a claim to, a search of the PPSA register may disclose financiers or other parties who do have a claim to those items.

Point to note: Lease documents should always make provision for how a landlord can deal with items and goods left behind when the lease is terminated or the tenant vacates the tenancy. A check on the PPSA register may assist the landlord to determine whether any other parties should be consulted prior to dealing with those items. The counter point is also relevant, in that landlords should be aware of their rights to assert themselves against a financier of a fitout who claims their registration on the PPS Register gives them a priority over the landlord's lien. If a claim is made asserting a PPSA right, landlords should not be bluffed into accepting the financier's position without first making further investigations and considering the exceptions to the PPSA.

As you can see from these examples, there is some potential for the new legislative regime to impact on landlord and tenant transactions. While those parties may not be required to have an intimate knowledge of the operations of the legislation and the register, it is worthwhile keeping PPSA in mind and, as always, it is important to seek specialist advice if PPSA may be relevant to any issues which arise as between landlords and tenants.

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.