Australia: Fixtures and the Personal Property Securities Act 2009 (Cth) - Fuzzy Logic?

This article is the second in a 3 part series by the author discussing whether the exclusion of fixtures from the scope of the PPSA is appropriate.

The first article discussed the common law rules relating to fixtures and the Canadian mechanism for overcoming the issues associated with those common law rules.

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.

1. Introduction

The Personal Property Securities Act 2009 (Cth) (PPSA) is currently due to commence in early 2012.¹

One of the primary aims of the PPSA is to provide transparency by implementing a single national law and register that will apply to all personal property security interests in Australia.² However, there are a number of important exclusions from the scope of the PPSA including land, certain rights declared not to be personal property for the purposes of the PPSA³ and fixtures.⁴

Although the PPSA was originally drafted to reverse the common law position in relation to fixtures,⁵ the Australian drafters, in a marked departure from their Canadian⁶ counterparts, elected to follow the New Zealand⁷ (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.⁸

This article examines the logic behind this omission by analysing why both the NZ and Australian drafters elected to exclude fixtures from their respective personal property securities legislation.

2. Canada

To properly understand why Australian and NZ drafters elected to exclude fixtures from the scope of the PPSA it is first necessary to consider briefly the Canadian solution to protecting security interests over fixtures.⁹

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").¹⁰

The fixture provisions provide a practical mechanism for determining priority disputes between fixture financiers and mortgagees by requiring a fixture financier to, amongst other things; register a notice on the relevant land titles register to obtain priority over a subsequent purchaser or mortgagee.¹¹

This means that a subsequent purchaser or mortgagee can rely on the integrity of the land titles system¹² before purchasing land or advancing funds for which the land is given as security.¹³

The Canadian Act codifies the priority rules for fixtures in a clear and accessible manner that gives effect to the parties' likely commercial expectations.¹⁴ This article will now consider why the NZ and Australian drafters elected to exclude fixtures from the scope of their respective personal property securities legislation.

3. NZ position

The NZ Act is silent in relation to fixtures.¹⁵

It is not entirely clear why the NZ drafters elected to exclude such an important provision. What is clear is that the NZ drafters do not appear to have undertaken a detailed consideration of the issue before electing to exclude fixtures from the scope of the NZ Act.¹⁶

The NZ drafters originally proposed to include a provision, not dissimilar to the pre-PPSA provisions contained in the Chattels Transfer Act 1924 (NZ) that were designed to work around a list of chattels that would be included in a schedule to the NZ Act¹⁷ and, notwithstanding any affixation to land, remain personal property for the purposes of the NZ Act.¹⁸ However, in the end, and with little justification for doing so, the NZ drafters elected to simply ignore fixtures altogether.

Two main arguments were raised in NZ supporting a divergence from the Canadian fixture provisions:

3.1 Different law and Circumstances
The first of those arguments was that the pre-PPSA law and circumstances in NZ were different to those that applied in Canada.¹⁹ The drafters considered that construction financing differed so significantly in Canada that NZ fixture financiers did not require the protection afforded by the fixture provisions.²⁰

The drafters were also concerned that the provisions would be more of a "shock" to NZ than they had been in Canada because the Canadians had recognised the priority of fixtures in their pre-PPSA legislation.²¹

However, this argument ignores the fact that the protection of security interests in fixtures is not foreign to NZ. In fact, the now repealed Chattel Transfer Act 1924 had allowed for the possibility of a chattel security in some items of farming and manufacturing plant, despite their being affixed to the land.²²

This argument also fails to recognise the substantial similarities between the common law of Canada and that of NZ, as well as the use of the Torrens System of land title in both countries.²³

There is no rationale for this argument.²⁴ The NZ Torrens system is more centralised than the Canadian provincial registers and the omission of the fixture provisions from the NZ Act effectively removes any protection a fixture financier in NZ would have had under the Chattel Transfer Act 1924.

3.2 Canadian problems
The second argument for omitting fixtures from the NZ Act focussed on apparent issues the Canadians were experiencing with the fixture provisions in the Canadian Act.²⁵

Unfortunately, the NZ reformers did not elaborate on these issues except to state that the Canadian rules were 'less than satisfactory in practice and had, more than any other feature of the Canadian Act, been subject to a number of amendments.'²⁶

What the NZ drafters overlooked was that the fixture provisions had been the subject of amendment not because the priority mechanism did not work, but rather because the Canadian drafters (and their US counterparts) could not agree on a definition of "fixture" to be included in the legislation.²⁷ Also, the Canadian case law dealing with the fixture provisions did not focus on the fundamental fixture priority rules.²⁸

The NZ Act's failure to deal with fixtures means NZ's fixture financiers must rely on the unsatisfactory common law rules to determine whether the chattels which they supplied or lent money to purchase are fixtures. As a result they bear an enormous risk if they take a security interest in chattels that become fixtures as they will lose their security interest in those items upon affixation and any mortgagees and purchasers of the land will consequently gain an unintended windfall.²⁹

Many of the justifications for rejecting a fixtures provision were not substantiated in NZ.³⁰ For example, no justification was provided as to how the NZ construction funding differed from Canadian construction funding and the drafters, although noting that the land titling systems in the US and NZ were substantially different, failed to recognise that the Canadian system was also based on the Torrens system of land titling.³¹

A number of commentators have indicated that the omission is puzzling³² and should be remedied.³³ The writer agrees and submits the issues raised by the NZ reformers should not have resulted in the exclusion of fixtures from the NZ Act. Instead, the drafters should have taken the aspects of the Canadian Act that appealed to them and amended them to overcome the areas of concern.³⁴

Regardless of whether the exclusion of fixtures from the NZ Act was a sensible idea, the Australian drafters appear to have given some weight to that decision when drafting the PPSA.³⁵

4. Australian position

The PPSA, in a marked departure from the Canadian Act, but in-line with the NZ Act, does not include a provision dealing with priority disputes relating to fixtures.³⁶

As was the case in NZ, the reasons for excluding fixtures from the scope of the PPSA are not entirely clear. However, it was evident there would be a divergence of views in this area from the very beginning.

In 1992, the proposals for reform set out in the Queensland and Victorian paper³⁷ recommended Australia adopt a system similar to the Article 9 regime.³⁹ On the other hand, the joint Commonwealth and New South Wales reform paper proposed the PPSA not apply to fixtures. Notwithstanding those differences of opinion it was agreed that reform in this area of law was required, even if there was disagreement about whether the PPSA was the correct place to attempt it.⁴⁰

In July 2006, the reform agenda regained momentum resulting in the Bond Bill⁴¹ which contained a fixtures provision⁴² that was almost identical to that contained in the Canadian Act.⁴³

By the time the Bill reached the Senate the view was that the inclusion of a fixture provision in the PPSA would be necessary to balance the interests of fixture financiers with those of mortgagees.⁴⁴ The proposed provisions subordinated any interest in land to the interest of a fixture financier.⁴⁵ That proposal gained momentum and a variation of section 36 was included in both the initial draft of the Bond Bill and the consultation draft of the PPSA Bill 2008.⁴⁶ That proposed section, although worded quite differently to the equivalent Canadian provision,⁴⁷ largely mirrored the intention of the Canadian Act⁴⁸ and, with a few exceptions⁴⁹, gave priority to the fixture financier⁵⁰ provided the fixture security interest was disclosed on the relevant State or Territory land titles register.⁵¹

Although there was some concern about the drafting style adopted in the Australian fixture provisions, there was an overwhelming support that the fixture provisions remain in the PPSA.⁵²

However, by the time the amended Bill reached the Senate in March 2009, the fixture provisions had been removed. The policy reasons for excluding fixtures from the PPSA appear to be as follows:

4.1 Maintain the Status Quo
Although the passage of the PPS Bill through parliament indicates a general acceptance of the fixture provisions the States and Territories expressed an underlying reluctance to overhaul the doctrine of fixtures.⁵³ Rather than include fixture provisions in the PPSA, the Standing Committee of Attorneys-General proposed a detailed review of the laws on fixtures before determining whether the fixture provisions should be included in any future amendment to the PPSA.⁵⁴

However, notwithstanding the proposed reform, the writer considers there was likely to have been a political agenda in the decision to exclude fixtures from the PPSA - firstly, to ensure harmonisation of laws between NZ and Australia and secondly to allow the States and Territories to maintain control of their relevant land titles registers.

4.2 Difficulties with State-Based Registers
The fixture provisions in the Canadian Act require a fixture financier to register its security interest not only on the Personal Property Register⁵⁵ (PPR) but also on the relevant land titles register.⁵⁶ The fixture provisions proposed for the PPSA⁵⁷ mirrored the Canadian Act.

It was acknowledged that if Australia were to adopt a fixture provision that would necessarily involve some interaction between the Personal Property Securities Register and the relevant land titles registers.⁵⁸ It was that interrelationship of registers that resulted in the States and Territories voicing their concerns about the impact such a relationship would have on their respective land laws.⁵⁹

Notwithstanding the reason given in the agreement, the writer considers the major driver for excluding fixtures from the scope of the PPSA is likely to have been a means by which the States and Territories could retain control of their State-controlled land titles registers, without having to also cede control of those registers to the Commonwealth.⁶⁰

Whatever the reason, the result is that priority disputes between fixture financiers and mortgagees must continue to be determined in accordance with the common law tests.⁶¹ As in NZ, if the degree and purpose of annexation are such that the collateral is considered to be a fixture then the fixture financier loses its security interest and priority in the chattels.

It is unfortunate that the Australian legislature did not follow the Canadian Act in this respect as the common law rules relating to fixtures are complex and uncertain⁶² and often difficult to apply.⁶³ The Canadian Act clearly results in a more equitable outcome and the writer considers the PPSA, together with the relevant land titles legislation, should be amended to adopt the Canadian approach.⁶⁴

5. Conclusion

The Australian drafter's election to follow the NZ Act and 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.⁶⁵

In order to prevent a windfall to a mortgagee or a subsequent purchaser of the land, the PPSA must be amended to better balance the competing interests of mortgagees and those of fixture financiers. A failure to promptly deal with this issue will undermine the purpose of the PPSA and as a result of the inconsistencies in the application of the common law principles leave the barriers to fixture financing in place.

¹However, on 12 October 2011 the Attorney-General introduced the Personal Property Securities (Registration Commencement) Bill 2011 into the Parliament. The Bill, if passed, will amend the definitions of migration time and registration commencement time so that the Attorney-General may determine another time for each. This will make it possible to extend the latest registration commencement time beyond 1 February 2012 if the Personal Property Securities Register is not ready by 30 January.
²Sandra Henderson-Kelly, Australian Personal Property Securities Reform and Secured Finance in the Aviation Industry (Paper presented at the ALAANZ 28th Annual Conference, 2009) 1, 4.
³Section 8 of the Personal Property Securities Act 200 (Cth).
⁴Fixtures 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.
⁵For a discussion of the common law rules regarding fixtures refer to the writer's first article in this series: Amanda Bull, 'Fixtures and the Personal Property Securities Act: maintaining the status quo' (2011) 27(4) Australian Banking & Finance Law Bulletin 70.
⁶Personal Property Security Act, RSS 1993, c P-6-2 (the Canadian Act).
⁷Personal Property Securities Act 1999 (NZ) (the NZ Act).
⁸Bull, above n5.
⁹A detailed analysis of s36 of the Canadian Act is outside the scope of this paper. For a useful discussion refer to Bull, above n5 and Baas, Susan, 'Fixtures under the Personal Property Securities Act: What New Zealand Doesn't Know It's Missing' (2001) 19 New Zealand Universities Law Review 404.
¹⁰Section 36 of Personal Property Security Act, RSBC 1996, c 359. .
¹¹R. Cuming and R. Wood, Saskatchewan and Manitoba Personal Property Security Acts Handbook (Thomson Canada 1994) 292 [36[1]]. However, this is not a prerequisite to the retention of the security interest in the chattels after they become fixtures. Registration in 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: Ronald C C Cuming and Roderick J Wood A Handbook on the Saskatchewan Personal Property Security Act (Law Reform Commission of Canada, 1987) 207 [2]. . 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.
¹²Cuming and Wood, above n11, 292 [36[1]].
¹³There is therefore a risk that a subsequent mortgagee or purchaser will take the property without notice of the PMSI's interest in the fixture.
¹⁴Anthony 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.
¹⁵ohn H Farrar and Mark A O'Regan, 'Reform of Personal Property Security Law' (Preliminary Paper No 6, New Zealand Law Reform Commission, May 1988) 86; Baas, above n9 404; Mike Gedye, Personal Property Securities: Consolidated Legislation and Analysis, (Thomson: 2001), 17 [4.4]; Linda Widdup and Laurie Mayne, Personal Property Securities Act: A Conceptual Approach, (LexisNexis Butterworths, revised ed, 2002) 34 [4.22].
¹⁶Baas, above n9, 404.
¹⁷Elizabeth Toomey, 'It's Not Yours, It's Mine! The Security Interest Holder, the Mortgagee, and Fixtures: A Powerful Cocktail' (2010) 12 Otago Law Review 369, 375; Baas, above n9, 415.
¹⁸The proposed NZ provision differed substantially from its counterpart in the Canadian Act and originally only applied to office partitions: refer to section 29 of the draft Bill appended to New Zealand Law Commission, A Personal Property Securities Act for New Zealand, Report No. 8 (April 1989) 49 and 132.
¹⁹New Zealand Law Commission, above n18, 132.
²⁰Mike 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.
²¹Conditional Sales Act R.S.S. 1909, c.145: MacDougall, above n44, 498; Michael Brannen, 'Business Issues: Fixtures and the PPSA' (1989) 53 Saskatchewan Law Review 285, 288.
²²Barry Allan, The Personal Property Securities Act 1999 Act & Analysis (Brookers, 2010) 32 [2.3.5].
²³Baas, above n9, 403.
²⁴Elizabeth Toomey, 'It's Not Yours, It's Mine! The Security Interest Holder, the Mortgagee, and Fixtures: A Powerful Cocktail' (2010) 12 Otago Law Review 369, 376; J Ziegel, 'Canadian Perspectives on the New Zealand Chattels Securities Act (2001) 7 New Zealand Business and Law Quarterly Review 118, 126.
²⁵Baas, above n9, 403.
²⁶New Zealand Law Commission, 'A Personal Property Securities Act for New Zealand' (Report No 8, New Zealand Law Commission, April 1989) 132.
²⁷Toomey, above n24, 376.
²⁸Ibid.
²⁹Barry Allan, The Personal Property Securities Act 1999 Act & Analysis (Brookers, 2010) 32 [2.3.5].
³⁰Baas, above n9, 416.
³¹Ibid.
³²including a number of Australian commentators: Duggan, above n14, 686.
³³Toomey, above n24, 379.
³⁴For example, the NZ drafters could have looked behind the Canadian Act to the UCC and adopted some of the initiatives adopted in that jurisdiction: Baas, above n9, 425.
³⁵In the writer's view the NZ decision was likely given more weight than was necessary because of the focus at that time on harmonising laws between the two jurisdictions.
³⁶Craig Wappett, Laurie Mayne and Tony Duggan, Review of the law on personal property securities: An international comparison, July 2006, 17 [3.1] available at .
³⁷A J Duggan and S W Begg, Personal Property Securities Law: A blueprint for reform (Discussion Paper No 39; Queensland Law Reform Commission, August 1992), A J Duggan and S W Begg, Personal Property Securities Law: A blueprint for reform (Discussion Paper No 28, Law Reform Commission of Victoria, August 1992).
³⁸Andrew Robertson, 'Competing Priority Claims to Fixtures' in John A Greig and Bryan Horrigan (eds), Enforcing Securities (The Law Book Company, 1994), 207, 239.
³⁹New South Wales Law Reform Commission, Personal Property Securities (Discussion Paper No 28 (1992)); Australian Law Reform Commission, Personal Property Securities (Discussion Paper No. 52, (1992)); Australian Law Reform Commission, Personal Property Securities (Discussion Paper No 64, (1993)) 13 but cf 26 where the Commission recommends a security interest in fixtures be revived should the fixture be removed from the land.
⁴⁰Robertson, above n38, 207, 239.
⁴¹The Bond Bill is a reference to the Personal Property Security Bill (The Bond Bill)' (2002) 14 Bond Law Review 132 (the "Bond Bill").
⁴²Section 41 of the Bond Bill.
⁴³Wappett, Mayne and Duggan, above n36.
⁴⁴Standing Committee of Attorneys-General, Review on the law of Personal Property Securities (Options Paper, Standing Committee of Attorneys-General, April 2006) 12 [76].
⁴⁵Ibid, 30. Interestingly, the footnote to this proposal in this Options Paper refers to ss82-85 of the NZ Act as the basis for this proposal. However, the writer notes that sections 82-85 of the NZ Act actually relate to priority interests in processed or commingled chattels and not fixtures. Perhaps this was a typographical error or perhaps the drafter's intended the commingling provisions contained in the NZ Act be interpreted in the PPSA to include fixtures.
⁴⁶Division 2 of Part 8 of the Bond Bill; Attorney-Generals Department, Personal Property Securities Bill 2008: Revised Commentary (December 2008) 17 [1.6].
⁴⁷Duggan, above n14, 687.
⁴⁸Section 37 of the Canadian Act.
⁴⁹Those exceptions included when the security interest was attached to the fixture before the fixture attached to the land, where the PPSR or the relevant land titles register contained information that would put any land purchaser on notice of such an interest, when the security interest attached to the fixture after the fixture attached to the land and an interest in land existed before the fixture had been perfected, and when the security interest was granted over an existing fixture: Division 2 of Part 8 of the Bond Bill.
⁵⁰Patrick 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, 257; Personal Property Securities Bill 2008 (Cth), Attorney-Generals Department, Personal Property Securities Bill 2008: commentary on consultation draft (2008) (the Commentary) 69-70 [8.17-8.20].
⁵¹Attorney-Generals Department, Personal Property Securities Bill 2008: commentary on consultation draft (2008) (the Commentary), 16 [2.23].
⁵²Duggan, above n14, 687. See e.g. Tasmania, Parliamentary Debates, Legislative Assembly, 1 September 2010, 6 ; Personal Property Securities Law Agreement (entered into on 2 October 2008) 3 [3.2 1].
⁵³Tasmania, Parliamentary Debates, Legislative Assembly, 1 September 2010, 6; Personal Property Securities Law Agreement (entered into on 2 October 2008) 3 [3.2 1].
⁵⁴Tasmania, Parliamentary Debates, Legislative Assembly, 1 September 2010, 6 . Although the second reading speech for the Personal Property Securities (Commonwealth Powers) Bill 2010 (Tas) indicates such a report was due to be provided by the Australian Law Reform Commission on 30 June 2011, the writer's investigations with both the Parliament of Tasmania and the Australian Law Reform Commission indicate there is currently no investigation being undertaken in relation to this issue.
⁵⁵The Personal Property Register is the electronic notice filing system established under the Canadian Act. See .
⁵⁶Sections 36 and 49 of the Canadian Act.
⁵⁷Division 2 of Part 8 of the Bond Bill; Attorney-Generals Department, Personal Property Securities Bill 2008: Revised Commentary (December 2008) 17 [1.6].
⁵⁸Financial Services Committee of the Business Law Section of the Law Council of Australia, Submission No. 2 to Attorney Generals Department, Review of the law on Personal Property Securities, 29 June 2007 1 [1]-[2].
⁵⁹Personal Property Securities Law Agreement (entered into on 2 October 2008) 3 [3.2 1]. Refer to the writer's comments in item 4.2 above.
⁶⁰This view is somewhat confirmed by Senate Standing Committee on Legal and Constitutional Affairs, Parliament of Australia, Exposure draft of the Personal Property Securities Bill 2008 (Cth) (March 2009) 12 [2.44]; Attorney-Generals Department, Personal Property Securities Bill 2008: Revised Commentary (December 2008) 155 [B.4] and 160 [B.36] and the Personal Property Securities Law Agreement (entered into on 2 October 2008) 3 [3.2 1] between the Commonwealth of Australia and each of its States and Territories, that simply provide that the provisions relating to fixtures were removed at the request of the States and Territories who were concerned about the operation of these provisions upon State and Territory based land laws.
⁶¹Amanda Stickley, 'Competition Between Mortgagees and Grantees to Fixtures' (1998) 6 Australian Property Law Journal 21; Financial Services Committee of the Business Law Section of the Law Council of Australia, Submission No. 2 to Attorney Generals Department, Review of the law on Personal Property Securities, 29 June 2007 1 [3].
⁶²Ross Abbs, The Law of fixtures: Informed Principle or Independent Predilection, (2004) 11 Australian Property Law Journal 35; N Ward, The Race for Possession: The Rights of Retention of Title Suppliers of Fixtures (1998) 26 Australian Business Law Review 185; Richard Scragg, Personal Property Securities Law Reform in New Zealand: An Update, (2002) 10 Insolvency Law Journal 180 in Commentary, above n102, 68 [8.10].
⁶³Quirk, above n50, 256; Stickley, above n61, 1; See Holland v Hodgson (1872) LR 7 CP 328 for an example of the concerns raised by the judiciary in relation to the degree of annexation test and Amanda Bull, 'Fixtures and the Personal Property Securities Act: maintaining the status quo' (2011) 27(4) Australian Banking & Finance Law Bulletin 70 for a discussion of related issues.
⁶⁴Mike Gedye, Personal Property Securities: Consolidated Legislation and Analysis, (Thomson: 2001), 17 [4.4];
⁶⁵ibid.

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.