This article is the first in a 3 part series by the author discussing whether the exclusion of fixtures from the scope of the PPSA is appropriate.
The second article will analyse why both the NZ and Australian drafters elected to exclude fixtures from their respective personal property securities legislation and the third article will suggest possible amendments to the PPSA and consider how secured parties can protect their interest in fixtures after the implementation of the PPSA.
The law regulating the priorities of interests in fixtures is complex and, in many areas, uncertain. 1 The law has developed in an inconsistent fashion largely because each case is decided on its facts.2
Nowhere does the application of the law of fixtures cause more difficulties than where a real property mortgagee and a fixture financier3 both claim rights in the same fixture. That is because the common law provides that a chattel loses its identity upon becoming affixed to land and becomes subject to any interest in the land.4 The harsh application of the common law rules means that it is nearly impossible for those with an interest in chattels to protect their interest should the chattels become affixed to land. As a result, there have been numerous calls for reform. 5
The Personal Property Securities Act 2009 (Cth) (PPSA), which is due to commence in early 2012 is largely based on Canadian6 and New Zealand7 (NZ) interpretations of the American Article 9 regime.8 Although the PPSA was originally drafted to reverse the common law position in relation to fixtures, the Australian drafters, in a marked departure from their Canadian counterparts, elected to follow the NZ approach and exclude fixtures from the scope of the PPSA.
As a result of this omission, the determination of whether chattels have become fixtures remains governed by the unsatisfactory common law.9
This article is the first in a three part series that will examine the logic behind this omission.
This article will consider the current state of the law in relation to fixtures. Having identified the difficulties in applying the law in this area, this article will then consider the Canadian solution10 and argue the omission of fixtures from the PPSA was a mistake.11
To properly understand why Australian drafters elected to exclude fixtures from the scope of the PPSA it is necessary to first consider the common law doctrine of fixtures.
2.1 Common Law position
The doctrine of fixtures can be traced back to the maxim "whatever is attached to the land becomes part of the land".12
In more recent times, 13 the principles have been stated as:
- That which is annexed to the land, prima facie, becomes part of the land; and
- To determine what constitutes an annexation it is necessary to consider the facts of each case and the degree and object of the annexation.14
Although the greatest weight was originally placed on the annexation test, the balance has now shifted to the intention of the parties.15
However, ascertaining the intention of the parties has proven difficult for the courts.16 For example, some cases have held that the relevant intention is whether the goods were intended to become part of the land17 to improve the premises,18 whereas other cases consider the intention should be whether the goods are affixed with the intention of remaining in position permanently or only for some temporary purpose.19
In Australian Provincial Insurance Co Ltd v Coroneo20 the court summarised the principles as follows:
- Goods fixed to the land, even slightly, are prima facie fixtures unless the intention of the parties indicates to the contrary:
- Whether the goods have been fixed with the intention to remain in place permanently or for some temporary purpose;21
- Whether the goods were fixed for the better enjoyment of the land or merely to steady the thing itself for better use or enjoyment;22 and
- If the removal of the goods would cause severe damage to either the goods themselves or the land to which they are affixed, is strong, but not necessarily conclusive, evidence that a permanent fixing was intended.23
There are two recognised exceptions to the above rules, namely tenant's fixtures24 and agricultural fixtures.25 The rules allow a tenant to remove fixtures installed in the premises during the term of a lease to be removed by the tenant at the expiry of that lease. The rationale for these exceptions is to recognise the hardship that would be placed on tenants if the above rules were to be applied strictly to them. 26
Notwithstanding the principles outlined above, the Australian judiciary still struggle with an objective application of the common law doctrine of fixtures. That is because 'although the principles are easily stated, uncertainty arises when they are applied to the facts.' 27
For example, seats screwed to the floor of a cinema have been held to be chattels in Lyon & Co v London & City Midland Bank28 and fixtures in Vaudeville Electric Cinema Ltd v Mariset29, a building was held to be a fixture in Neylon v Dickens30 but a chattel in Trustbank Canterbury Ltd v Lockwood Buildings Ltd,31 and machinery affixed to a factory floor was held to be a fixture in Holland v Hodgson32 and Mather v Fraser33 and a chattel in Scott and Sally Dixon Investment Co Pty Ltd (In liq) v Woak-Wine Industries Pty Ltd.34
The apparent inconsistency in the above cases indicates that the shift in focus from the degree of annexation to the object of annexation has also involved a greater reliance upon the facts of each case. In other words, although the degree of annexation and purpose of annexation remain important factors, neither test, on its own, is sufficient to determine whether an item is a fixture.35 Rather, regard must be had to all the relevant circumstances and no single factor will necessarily override another factor.36 There is also no principle of law that a particular item will remain either a fixture or a chattel,37 particularly as the use of objects can transform over time.38
The application of the above rules is particularly important in the area of secured finance. As a basic proposition, a mortgagee is, upon registration of a mortgage, entitled to treat any fixtures annexed by the mortgagor to the mortgaged property as part of the land whether the fixtures have been annexed before or after the mortgage.39 The difficulty for secured financiers is determining which chattels are at risk of becoming fixtures. The inconsistent application of the tests in this area of law has made this decision difficult. One of the biggest risks for fixture financiers is that in many cases it is impossible to protect their interest from the affect of the item being affixed to the land.40
Although Canadian judges face similar difficulties in applying the common law rules,41 the Canadian Act includes provisions that assist in resolving such disputes by reversing this harsh common law position.42
This article will now discuss Canada's attempt at overcoming the harsh application of the common law.
3.1 Canadian fixture provisions
Section 36 of the Canadian Act sets out specific priority rules that govern security interests in fixtures and competing security interests in land ("fixture provisions").43 The fixture provisions attempt to balance the interests of mortgagees and fixture financiers44 by effectively altering the common law position that a mortgagee will have the best interest in any fixtures on the land.45
In doing so, the Canadian Act does not attempt to comprehensively define fixtures,46 nor does it draw a distinction between different types of fixtures.47 Rather, the Canadian Act simply defines fixtures as "? not include[ing] building materials"48 and leaves the common law to determine whether goods (other than building materials) have become fixtures.49
"Building materials" are defined broadly in the Canadian Act to include any materials that are incorporated into a building, including those that would involve the dislocation or destruction of the building or cause substantial damage to or weakening of the building".50 Unlike some of the other Article 9 regimes, the Canadian Act also expressly excludes heating, air-conditioning, conveyancing devices and machinery installed in a building or on land for use in carrying on an activity in the building or on the land.51
This definition of "building materials" is the Canadian drafter's attempt to avoid some of the difficulties of characterisation of goods as fixtures under the common law by recognising that modern building materials and construction techniques allow many parts of a building to be easily disassembled.53 Accordingly, the common law test of degree of affixation is no longer necessary to determine if the materials should be subject to removal by a fixture financier. Instead, a more practical approach is adopted, that is, if the materials are integral to the building they cannot be removed from the land by a fixture financier.
There are therefore 3 possible scenarios under the Canadian Act definition of fixtures:54
- the goods are building materials, in which case they fall outside the Canadian Act's definition of fixtures and any security interest registered over them will be lost upon their affixation to land.55
- the goods are chattels (as they do not satisfy the common law tests), in which case they fall outside the fixture provisions, but can be dealt with in accordance with the general priority rules in the Canadian Act;56 or
- the goods are fixtures pursuant to the common law tests, in which case the fixture provisions of the Canadian Act apply.
Importantly, the fixture provisions draw a distinction between security interests that attach to goods before the goods become fixtures57 and those that attach to goods after the goods become fixtures.58
In the first situation, the fixture financier will have priority over the mortgagee. In the second situation the fixture financier's interest will be subordinated to the interest of a person who has an interest in the land at the time the goods become fixtures and who has not:59
- consented to the security interest;
- disclaimed an interest in the chattels/fixtures;
- entered into an agreement allowing the removal of the goods; or
- otherwise precluded itself from preventing the removal the goods.
In either case, a fixture financier must register a notice on the relevant land titles register to obtain priority over a subsequent purchaser or mortgagee.60 This means that a subsequent purchaser or mortgagee can rely on the integrity of the land titles system61 before purchasing land or advancing funds for which the land is given as security.63
The rational behind section 36 is twofold:
- to reverse the common law principle that chattels affixed to land become part of the land to which they are affixed; and
- to protect parties who have a clear and measurable interest in chattels that become affixed to land. For example, in the absence of notice, the party with an interest in land is likely to assume that its acquisition includes any fixtures,64 but equally, where a chattel is attached to land after the mortgage the fixture provisions prevent a windfall to the mortgagee who would not have considered the fixture when it dealt with the land.65
The benefit of the Canadian regime is that parties who search the title for the land to which the goods are affixed will be aware of the existence of the fixture, and related security interest, by reason of the registered fixtures notice on the title. So, while the law of fixtures under the common law is not altered, the question of priorities among parties is determined by statute.66
The Australian drafter's election to exclude fixtures from the scope of the PPSA means there is no easy way fixture financiers can protect their security position in those chattels as they will not usually have any basis for registering or claiming priority under the land titles legislation.67
Although the fixture provisions in the Canadian Act do not do away with the common law doctrine of fixtures they do provide a clear methodology for determining disputes between mortgagees and fixture financiers. The Australian drafters omission of fixtures from the PPSA was an opportunity lost to correct what has always been a confusing area of law.68
1Andrew Robertson, 'Competing Priority
Claims to Fixtures' in John A Greig and Bryan Horrigan (eds),
Enforcing Securities (The Law Book Company, 1994), 207, 235.
2Ibid. See also Palumberi v Palumberi (1986) ANZ ConvR 592; Yallingup Beach Caravan Park v Valuer-General (1994) 11 SR (WA) 355, 357; NH Dunn Pty Ltd v LM Ericsson Pty Ltd (1979) 2 BPR 9241; National Australia Bank Ltd v Blacker (2000) 179 ALR 97 (Conti J).
3For the sake of brevity, this paper will refer to interests in land as "mortgagees" and interests in fixtures as "fixture financiers".
4North Shore Gas Co Ltd v Cmr of Stamp Duties (NSW) (1940) 63 CLR 52 at 68 (Dixon J); Lees & Leech Pty Ltd v Cmr of Taxation (1997) 73 FCR 136, 149 (Hill J); Wake v Hall (1883) LR 8 App Cas 195 at 203 (Lord Blackburn) cf Canadian Imperial Bank of Commerce v Nelson (1988) 68 Sask R 278; Rich-Wood Kitchens Ltd v National Trust Co (1988) 8 PPSAC 131 where it was held that the fixture financier had priority over the mortgagee in respect of the goods.
5Patrick Quirk, 'Whether Australian Secured Transactions Laws Will Transition from the English System to the Personal Property Securities Act' (2008-2009) 31 Thomas Jefferson Law Review 219, 256-257; Sharon Christensen, 'Reservation of Title in Goods Attached to Personalty or Realty' (1993) 4 Journal of Banking and Finance Law and Practice 264; Amanda Stickley, 'Competition Between Mortgagees and Grantees to Fixtures' (1998) 6 Australian Property Law Journal 1; Robertson, above n1, 207, 236 and 239.
6Personal Property Security Act, RSS 1993, c P-6-2 (the "Canadian Act").
7Personal Property Securities Act 1999 (NZ) (the "NZ Act").
8The original personal property securities legislation is contained in Article 9 of the American Uniform Commercial Code (US) (the "UCC"), which was closely followed by the first Canadian personal property security legislation in Ontario. The scope of this paper does not allow a detailed analysis of the Article 9 or Ontario regimes. For a detailed discussion on that legislation refer to Frank Bennett, Bennett on PPSA Ontario, (CCH Canadian Limited, 1991); Stephen L. Sepinuck, Practice under Article 9 of the UCC, (American Bar Association, 2nd ed, 2008).
9Personal property is defined in the PPSA to mean property (including a licence) other than land: section 10 of the Personal Property Securities Act 2009 (Cth)). Land is defined to include all estate and interests in land, whether freehold, leasehold or chattel, but does not include fixtures. Fixtures are defined as goods, other than crops, that are affixed to land. Section 8(j) of the PPSA states that the PPSA does not apply to an interest in a fixture. The result is that, even though fixtures are personal property for the purposes of the PPSA, its provisions do not apply to regulate security interests in fixtures: Andrew Boxall, Allens Arthur Robinson, Security Interests under the Personal Property Securities Act 2009 (Cwth): Threshold Issues in Ship Finance, (10 November 2010) Federal Court .
10The Canadian Act includes a provision that expressly deals with competing priority interests in land and fixture: section 36 of the Canadian Act.
11The statutory review date is currently no later than 30 January 2015: section 343 of the Personal Property Securities Act 2009 (Cth).
12In Latin, quicquid plantature solo, solo cedit.
13Holland v Hodgson (1872) LR 7 CP 328.
14It has been held that agreements between a fixture financier and a grantor/mortgagor should not be given any weight when determining whether chattels have become fixtures because they are not "patent for all the world to see": Hobson v Gorringe  1 Ch 182; See also Christensen, above n5, 271; Robertson, above n1, 207, 209; Anthony v Commonwealth (1973) 7 ALJR 83. For an example of how little weight courts may place on the subjective intention of the parties see Deventer Pty Ltd v BP Australia Ltd (1983-84) ANZ Conv R 311.
15Reid v Smith (1906) 3 CLR 656; Stack v T Eaton Co (1902) 4 OLR 335, 338 (Meredith J); See also Christensen, above n5, 271.
16Carmel MacDonald, Les McCrimmon, Anne Wallace and M A Stephenson, Real Property Law in Queensland (LBC Information Services, 1998) 106.
17Holland v Hodgson (1872) LR 7 CP 328; Reid v Smith (1906) 3 CLR 656,662-663.
18Leigh v Taylor  AC 157.
19Bank of Melbourne Ltd v CBFC Leasing Pty Ltd (1991) Q Conv R 54-395; Australian Joint Stock Bank v Colonial Finance, Mortgage, Investment and Guarantee Corporation (1894) 15 NSWLR 464; Pan Australian Credits (SA) Pty Ltd v Kolim Pty Ltd (1981) 27 SASR 353; See also MacDonald, McCrimmon, Wallace and Stephenson, above n16, 107.
20(1938) 38 SR (NSW) 700, 712-713 (Jordan CJ).
21cf N H Dunn Pty Ltd v L M Ericsson Pty Ltd (1979) 2 BPR 9241, 9243-4 in which Mahoney J doubted whether this test was consistent with the High Court decisions of AG (Cth) v RT Co Pty Ltd (No 2) (1957) 97 CLR 146 and Anthony v Commonwealth (1973) 47 ALJR 83. This view is espoused also by Robertson, above n1, 207, 212.
22See also Leigh v Taylor  AC 157 (affixation of tapestries).
23See also Caley v Rogers  St R Qd 25, 32; Holland v Hodgson (1872) LR 7 CP 328; Re Roy Wolf Brewing Co  2 DLR 1002; Deloitte & Touche Inc v 1035839 Ontario Inc (1996) 28 OR (3rd) 139.
24MacDonald, McCrimmon, Wallace and Stephenson, above n16, 111; Holland v Hodgson (1872) LR 7 CP 328; Bain v Brand (1876) 1 App Cas 762, 772; Northshore Gas Company Ltd v Commissioner of Stamp Duties (NSW) (1940) 63 CLR 32, 68; cf Shell Co of Australia Ltd v Bailey  WAR 233, 243 and Southbank Corp v Steel Finne Fabrications Pty Ltd (unreported, Supreme Court of Queensland, Thomas J, 10 February 1993). See also section 45 of the Retail Shop Leases Act 1994 (Qld) (Lessee's rights to deal with business assets) and sections 207-209 of the Residential Tenancies and Rooming Accommodation Act 2008 (Qld).
25Section 155 of the Property Law Act 1974 (Qld); section 26 of the Landlord and Tenant Act 1935 (TAS); section 10 of the Agricultural Tenancies Act 1990 (NSW); Section 28 of the Landlord and Tenant Act 1958 (VIC).
26A detailed discussion of these exceptions is outside the scope of this paper. However, see MacDonald, McCrimmon, Wallace and Stephenson, above n16, 111 " 115.
27Neylon v Dickens  2 NZLR 714 (Jeffries J).
28 2 KB 135.
29 2 Ch 74.
30 2 NZLR 714.
31 1 NZLR 666, affirmed on appeal in Lockwood Buildings Ltd v Trustbank Canterbury Ltd  1 NZLR 22. For an interesting analysis of the common law doctrine of fixtures and its application to mobile homes in Canada, Australia, England and America see Plaza Equities Ltd v Bank of Nova Scotia (1978) CanLii 804, 823 -.
32(1872) LR 7 CP 328.
33(1856) 25 LJ (Ch) 361.
34 SASC 161.
35See e.g., NH Dunn Pty Ltd v LM Ericsson Pty Ltd (1979) 2 BPR 9241.
36LexisNexis, Halsbury's Laws of Australia, (at 4 August 2011) Real Property, "Creation and Acquisition' [225 September 2008].
37North West Trust Co v Rezyn Developments Inc (1991) 1 BCAC 219, 222 (British Columbia Court of Appeal) (Proudfoot JA).
38Bonnie L Tse, Fixtures and Chattels " When Will It Be Fixed" (17 August 2010) Cassels Brock Lawyers
39Kay's Leasing Corporation Pty Ltd v CSR Provident Fund Nominees Pty Ltd  VR 429, 438; Pan Australian Credits (SA) Pty Ltd v Kolim Pty Ltd (1981) 27 SASR 353. That is the case even if the mortgage doesn't contain an express provision granting the mortgagee an interest in the fixtures: Southport v West Lancashire Banking Co v Thompson (1887) 37 Ch. D 64, 72.
40Security interests in some chattels can currently be registered: Chapter 2K of the Corporations Act 2001 (Cth); section 8(1) of the Instruments Act 1933 (ACT), section 8(1) of the Instruments Act 1935 (NT); section 2(2) of the Bills of Sale Act 1886 (SA); section 3(1) of the Security Interest in Goods Act 2005 (NSW); section 6B of the Bills of Sale and Other Instruments Act 1955 (Qld). However, any such interest will be subject to the indefeasibility of title provisions in the relevant land titles legislation favouring a registered mortgagee over a fixture financier: See, e.g., Re Samuel Allen & Sons Ltd  1 Ch 575, 581; William D Duncan and Lindy Willmott, Mortgages Law in Australia (Federation Press, 2nd ed, 1996) 157 [5.13] cf Chattel Securities Act 1987 (Vic) and Chattel Securities Act 1987 (WA) that allow a security interest in a chattel to remain after that chattel becomes a fixture: Robertson, above n1, 207, 236.
41The general common law principles in Canada are set out in the case of Dolan v Bank of Montreal (1985) 5 PPSAC 196 (Saskatchewan Court of Appeal) in which the judges referred to the principles set out in Stack v Eaton (1902) 4 OLR 335 (Ontario Court of Appeal). For an excellent analysis of the American law of fixtures (which closely reflects the Canadian approach) refer to Alphonse M Squillante, 'The Law of Fixtures: Common Law and The Uniform Commercial Code' (Pt 1) (1986) 15 Hofstra Law Review 191.
42Ronald C C Cuming and Roderick J Wood, A Handbook on the Saskatchewan Personal Property Security Act (Law Reform Commission of Canada, 1987) 207 .
43Section 36 of Personal Property Security Act, RSBC 1996, c 359
44Bruce MacDougall, 'Fixtures and the PPSA: Of the Wooden Horse of Troy, Creditors in the Weeds and Statutory Ambush' (1993) 72 The Canadian Bar Review 496, 500.
45Plaza Equities v Bank of Nova Scotia (1978) CanLii 804, 830  (referring to the Conditional Sales Act R.S.S. 1909, c.145 which is the predecessor to the Canadian Act).
46Some commentators argue that there should be a statutory definition of "fixture" in the Canadian Act: Vincent M Nathan, 'Priorities in Fixture Collateral in Ohio: A Proposal for Reform (1973) 34 Ohio State Law Journal 719,740. However, while some items are clearly fixtures e.g. plumbing, ceiling lights there are others that are more problematic (refer to item 2.1 above for examples of the ad hoc application of this area of the law. The third article in this series will consider whether a statutory definition f fixtures is appropriate in the Australian context.
47For example, unlike the common law there is no exception for trade or tenant's fixtures. R. Cuming and R. Wood, Saskatchewan and Manitoba Personal Property Security Acts Handbook (Thomson Canada 1994) 293 [36].
48Section 2(1)(s) of the Canadian Act.
49Dolan v Bank of Montreal (1984) 5 PPSAC 196 (Saskatchewan Court of Appeal); Stack v T. Eaton Co (1902) 4 OLR 335 (Ontario Divisional Court), La Salle Recreations Ltd v Canadian Camdex Investments Ltd (1969) 68 WWR 339 (British Columbia Court of Appeal), Plaza Equities Ltd v Bank of Nova Scotia  3 WWR 385 (Alberta Supreme Court Trial Division), North West Trust Co. v Rezyn Developments (1991) 81 DLR(4th) 751 (British Columbia Court of Appeal).
50Section 2(1)(e) of the Canadian Act. Because the definition of "building materials" is drafted broadly it has been interpreted to cover "such things that go into the construction of a building which " nevertheless are integral parts of the whole construction"In determining what is building material it is necessary to consider the entire construction: Rockett Lumber and Building Supplies Limited v Papageorgiou (1979) 30 CBR 183 (Ontario County Court); Charles A Hare Ltd v Payne (1982) 2 PPSAC 93 (Ontario High Court); City of Port Colborne v Port Colborne Yacht Harbor & Marine Ltd (1990) 71 OR (2nd) 536 (Ontario High Court).
51Section 2(1)(e)(iii) and (iv) of the Canadian Act.
52MacDougall, above n44, 498.
53Cuming and Wood, above n47, 293 [36].
56Part III of the Canadian Act which provides, with a few exceptions, that a perfected (i.e. registered or security property that is in the secured party's possession or control) security interest will have priority over an unperfected security interest.
57Section 36(3) of the Canadian Act. The reader should note that "attach" used in this context is a reference to the requirement that a security interest under the PPSA attach to the secured property. A security interest attaches to property (known as collateral in the PPSA) when the grantor has rights in the collateral or the power to transfer rights in the collateral to the secured party and either value is given for the security interest or the grantor does an act by which the security interest arises: section 19 of the Personal Property Securities Act 2009 (Cth). For example, signing a letter of offer, security documents or a bailment agreement.
58Section 36(6) of the Canadian Act.
59Section 36(6) of the Canadian Act.
60Cuming and Wood, above n47, 292 [36]. However, this is not a prerequisite to the retention of the security interest in the chattels after they become fixtures. Registration on the Canadian Personal Property Register is only relevant when there are competing security interests in the chattels before they become fixtures and registration on the land titles registry is only required where there is a priority dispute between the fixture financier and a person who acquires an interest in the land (including a mortgagee who makes further advances under its mortgage after the chattels become fixtures: Cuming and Wood, above n42, 207 . Secured parties with a purchase money security interest (PMSI) in chattels will retain priority provided they register their security interest on the relevant land titles register within 15 days of the chattels becoming fixtures: Section 36(7) of the Canadian Act. The third article in this series will discuss the circular priority issues that arise in such a situation.
61Cuming and Wood, above n47, 292 [36].
62There is therefore a risk that a subsequent mortgagee or purchaser will take the property without notice of the PMSI's interest in the fixture.
63Cuming and Wood, above n42, 207 .
64Anthony Duggan, Submission to the Australian Attorney-General's Department, Personal Property Securities Bill 2008, May 2008 in Anthony Duggan and Michael Gedye, Personal Property Security Law Reform in Australia and New Zealand: The Impetus for Change' (2008-2009) 27 Pennsylvania State International Law Review 655, 686.
66Brian Madigan, 'Chattels and Fixtures ~ Personal Property Security Act' on activerain, activerain 5 (23 January 2011).
67Mike Gedye, 'A Distant Export: The New Zealand Experience with a North American Style Personal Property Security Regime' (2006) 43 Canadian Business Law Journal 208, 214.
68Squillante, above n41, 502.
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.