Amendments to the definition of PPS Lease in the PPSA

08 Mar 2017

On 1 March, the Personal Property Securities Amendment (PPS Leases) Bill 2017 (the Bill) was introduced and received its second reading.

The purpose of the Bill is to amend the definition of 'PPS Lease' in the Personal Property Securities Act 2009 (Cth) (PPSA) by:

  1. extending the term of a lease before it may qualify as a PPS Lease from one year to two years; and
  2. providing that a lease or bailment for an indefinite term may only become a PPS Lease if the lessee/bailee remains in uninterrupted possession of the goods for at least two years with the consent of the lessor/bailor.

No date has been set for the passing of the Bill and the giving of the Royal Assent.

The Bill does not affect the application of the PPSA to leases which in substance secure the payment or performance of an obligation.

Current Position

Currently, a lease or bailment of personal property will be a PPS Lease if the lease or bailment is:

  1. for a term of more than one year;
  2. for an indefinite term;
  3. for a term of up to one year that is either automatically renewable or renewable at the option of one of the parties for one or more terms and the total of all of the terms might exceed one year; or
  4. for a term of up to one year and the lessee/bailee, with the consent of the lessor/bailor, stays in possession of the goods for more than one year (i.e. only once the lessee/bailee has been in possession of the property for one year will the lease become a PPS lease),
    unless:
  5. the lessor/bailor is not regularly engaged in the business of leasing/bailing goods;
  6. it is a lease of consumer property which is part of a lease of land and the leased property is incidental to the use and enjoyment of the land;
  7. it is excluded by regulation; or
  8. in the case of bailments, the bailee does not provide value for the bailment.

A PPS Lease is deemed to give rive rise to a security interest under the PPSA (i.e. it does not need to secure payment or performance of an obligation) and, unless it is part of a sale and leaseback, will be a Purchase Money Security Interest (PMSI).

As a PPS Lease gives rise to a security interest, the lessor/bailor must register a financing statement on the Personal Property Securities Register (PPSR) to protect the priority of its interests in the goods. Please see our review of the recent decision in Power Rental Op Co Australia, LLC v Forge Group Power Pty Ltd (in liq) (receivers and managers appointed) which illustrates the dangers of not registering a financing statement on the PPSR in a transaction which gives rise to a PPS Lease. Click here

The Problem

The concept of PPS Leases has been problematic for lessors/bailors and financiers since the introduction of the PPSA:

  1. first, in understanding which transactions give rise to a PPS Lease and the necessity of registering a financing statement (and the consequences of not doing so); and
  2. secondly, from an administrative perspective, placing, what some consider to be, an additional, unnecessary and not inexpensive burden on lessors/bailors, many of whom are small to medium sized enterprises that enter into leases that have an indefinite term but are oftentimes of very short duration (i.e. less than one year).

The Amendment

To lighten the administrative burden on some lessors/bailors, an amendment to the definition of 'PPS Lease' is proposed so that a lease/bailment of personal property will not be a PPS Lease unless the lease/bailment is:

  1. for a term of two years;
  2. for a term of up to two years that is either automatically renewable or renewable at the option of one of the parties for one or more terms if the total of all the terms might exceed two years; or
  3. for a term of up to two years or for an indefinite term and the lessee/bailee, with the consent of the lessor/bailor, stays in possession of the goods for more than two years (i.e. only once the lessee/bailee has been in possession of the property for two years will the lease become a PPS lease),

and the exclusions set out in paragraphs 5, 6, 7 or 8 above do not apply.

Related Issue

While the proposed amendment to the definition of PPS Lease will likely assist many within the leasing industry, the registration timeframes for ensuring PMSI priority remains uncertain (particularly in the context of PPS Leases).

Currently, in order for a PMSI in goods to have priority over a non-PMSI in the same goods, the registration on the PPSR that perfects the PMSI must:

  1. in the case of goods which are inventory, be registered at the time that the grantor (or another person at the request of the grantor) obtains possession of the goods; or
  2. in the case of goods that are not inventory, be registered within 15 business days of the date that the grantor (or another person at the request of the grantor) obtains possession of the goods,

and state that the interest is a PMSI.

It is not uncommon for a person to be in possession of goods and subsequently enter into a lease in respect of those goods as the lessee (for example, goods may be delivered prior to execution of the lease documents) or be the lessee of goods for a short term (i.e. less than one year) but remain in possession for more than one year (or two years after the Bill is enacted).

As the PPSA does not draw a distinction between the different capacities that a person may hold goods, a lessor/bailor may not get the priority afforded to PMSIs under the PPSA if:

  1. a person has been in possession of goods as a non-grantor (for example, as a lessee under a lease that is not a PPS Lease and does not secure payment or the performance of an obligation) but subsequently becomes a grantor (for example, under a lease which subsequently becomes a PPS Lease because the one year (soon to be two years) in possession threshold has passed); and
  2. the lessor has not previously registered a financing statement, as the grantor possession timeframe thresholds may have already passed.

While one view is that the timeframe is determined by reference to the time at which the grantor comes into possession of the goods as a grantor, the Australian courts have not yet been asked to consider the issue in detail.

A further amendment to the PPSA to clarify this issue would be welcomed, and possibly avoid the need for one unfortunate lessor/bailor to spend significant amounts to get the needed clarification. 

For further information about this article, please contact Partner David Murray-Nobbs or Senior Associate Stuart Stevens.

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