There are a lot of people in the real estate industry struggling to understand what PPS is all about and how and why it is relevant to leases of real estate. Well here is a simplified explanation.
"PPS" stands for Personal Property Securities and "PPSA" is the Personal Property Securities Act. The purpose of the Act is to enable parties to protect their "security interests" in personal property. Personal property covers just about any kind of property you can think of, whether it is used for business purposes or for personal or domestic purposes, but not real estate. That's because security interests over real estate are protected by way of mortgages registered at the Titles Office. Personal property can include cars, boats, aircraft, livestock, crops, bank accounts, investments and other financial property, and intellectual property such as trade marks and designs. We'll refer to this kind of property as "goods" to avoid confusion with real estate.
There are basically three kinds of "security interests" that can be protected under the Act:
- a traditional security interest, which is where the owner of goods grants rights over the goods to secure payment of money or other obligations by a third party. For example, a bank might lend money to a manufacturer and take a "security interest" in the machinery owned by the manufacturer;
- a "retention of title" type arrangement. For example, a party supplies goods to a person on the basis that ownership in the goods remains with the supplier until the buyer has finished paying for the goods. In that case the supplier has what is known as a "purchase money security interest" in the goods for the amount of the unpaid purchase price. This form of interest is often referred to by the acronym "PMSI"; and
- an arrangement where a party has possession of goods, which belong to someone else, under a lease, consignment or bailment arrangement. This is knows as a "PPS Lease". Examples are where a hire company leases equipment to a construction company or where an artist has artwork on consignment with an art gallery. This is very different to a traditional "security interest" because it is in fact the owner that has a security interest in its own goods. This is where the Act can apply - where goods are leased in conjunction with real estate. We'll explain that in a moment.
Now, if a security interest is not protected (the Act uses the term "perfected") then a third party dealing with those goods is not bound by that unprotected interest. The most common way to protect a security interest is to register it on the new PPS Register. This can be done online, 24/7. Fees are payable – it is not expensive but fees vary depending on the length of registration. The following information is needed to register a security interest:
- the name of the grantor – in most cases this is the owner of the goods;
- the name of the secured party – in most cases this is the party that has the security interest;
- a general description of the goods (or it can be an interest over all the assets owned by the grantor now and in the future); and
- an expiry date – ie the length of the registration.
If you want to know whether goods owned by a person or a company are subject to any security interests, you can do a "grantor search". You go onto the online PPS Register and input the name of the person or company and a report is provided as to what, if any, security interests are registered against that person or company, with a description of the goods that are covered by that security interest.
There is a limited range of goods that can be registered by their serial number only – motor vehicles, aircraft and trade marks are examples – and in that case you search by serial number and not by "grantor".
Now, let's get back to how the new PPS regime can affect leasing of real estate.
If a lease of premises for a term of 12 months or more (including renewals) includes commercial goods belonging to the landlord – ie goods which are not fixtures (because fixtures are part of the real estate) – then there is a "PPS Lease" with respect to those goods, between the landlord and the tenant. But, unlike most traditional security interests, in this case the tenant is the "grantor", not the owner. The owner is the "secured party".
Why is there such a thing as a PPS Lease? Why does the owner of goods have to register a "security interest" in goods they own? The answer is that it is the only way a landlord can protect its property if the tenant becomes insolvent. Section 267 of the Act provides that if party that has possession of goods under a PPS Lease (ie a commercial tenant) becomes insolvent, and the owner of the goods (i.e. the landlord) has not registered a PPS Lease, then the goods are, in effect, deemed to belong to the insolvent party. This means that the creditors of the insolvent party get the benefit of the goods and not the owner! Section 269 does entitle the owner to compensation for the lost goods, but this is cold comfort where the tenant is insolvent.
A recent case in the Supreme Court of NSW is exactly on point. In Albarran (as recs and mgrs of Maiden Civil (P&E) v Queensland Excavation Services Pty Ltd  NSWSC 852, QES leased two Caterpillar excavation machines to Maiden. As owner of the equipment, QES was entitled to register a PPS Lease but did not. Maiden was placed in receivership. QES was unable to recover the machinery – it was, in effect, deemed to be the property of the lessee and the receiver was free to sell the machines and pay the proceeds to the secured creditor. The owner lost its machinery and received nothing from the sale proceeds.
Important things to know about registration
- Where there are two or more security interests registered over the same goods, priority is determined by time of registration – ie earlier registration has priority over later registration. But PPS Leases (and PMSIs) are special – if registered within time, they leap frog ahead of any other existing registrations. So for example, if a tenant has already granted a security interest to its bankers over all its existing and future assets, instead of the tenant's bank having priority over the landlord in relation to the landlord's own goods, the landlord's interest gets priority even though it was registered later in time. But in order to obtain this special priority, a PPS Lease must be registered within 15 business days of the tenant obtaining possession of the goods. This usually occurs on commencement of the lease but can occur earlier if, for example, the tenant has early occupation under a fitout licence and the landlord is paying for goods being delivered during that fitout period.
- If the tenant assigns its lease, a new party takes possession of the goods – ie the assignee. It is therefore necessary for the landlord to register a new PPS Lease (because there is a new grantor – ie the assignee) within 15 business days of the assignment taking effect.
- If the tenant sub-leases the premises, the sub-tenant takes possession of the goods. However, if the landlord is not a party to the sub-lease it may not be able to register a PPS Lease. But the original tenant may be able to, because the tenant is in fact leasing the goods (by way of a sub-lease) to the sub-tenant.
- When describing the goods in the registration, it is not necessary to itemise all the goods. In fact, in some cases that might not even be possible at the time of registration. It would be sufficient to refer, for example, to "the Landlord's Goods as described in the Lease between ## and ## dated ## in relation to premises situated at ##".
Landlord's fitout contributions are not, per se, protectable by registration. Very often a large part of a fitout contribution will be spent on modifications to the base building and/or fixtures, which automatically become part of the freehold. Remember, the Act does not apply to real estate, which includes fixtures. However, to the extent that the landlord's contribution is spent on goods – for example loose furniture and equipment – and the lease is clear that the landlord retains ownership in these items, they can be protected by registering a PPS Lease.
Is it all really worth it?
This is a commercial judgement to be made by the landlord on a case by case basis. Does the value of the goods warrant the administrative burden of registration, re-registration on assignment and removal of the registration on expiry of the lease? Bear in mind that the value of the goods may diminish over the term of the lease, or the "salvage" value may be much lower that the original cost.
Cash deposits and Bank Guarantees
A quick word about security deposits and Bank Guarantees. A cash deposit – whether held by the landlord or in joint names – still belongs to the tenant. It is held as security for performance by the tenant under the lease. Therefore, the landlord has a security interest (this is a traditional form of security interest, not a PPS Lease) which can and should be registered. However, it will rank behind any pre-existing security interest that the tenant may already have granted, such as an all assets charge in favour of its bankers. There are also circumstances in which the bank with whom the deposit is held could have priority over the money in the account, if the tenant owes money to the bank.
As a result of the new Act, security deposits now involve additional administration requirements and come with additional risks.
A Bank Guarantee, on the other hand, does not belong to the tenant – it is a direct agreement by the bank to pay the landlord a specified amount of money on demand. There are no PPS implications. Bank Guarantees are now widely regarded as the most preferable form of lease security.
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.