The Court of Appeal clarifies the meaning of fixtures under the PPSA – Financiers take note

22 Feb 2017

The Personal Property Securities Act 2009 (Cth) (PPSA) does not regulate interests in land or fixtures, which are traditionally regarded as forming part of the land. The practical difficulty that arises is determining when goods brought onto land become fixtures and, as a consequence, whether the interests in those goods are regulated by a regime other than the PPSA.

In the recent case of Power Rental Op Co Australia, LLC - v- Forge Group Power Pty Limited (in liquidation) (receivers and managers appointed), Power Rental Op Co Australia, LLC (Power Rental) argued that there is a difference between what constitutes a fixture for the purposes of the PPSA and what constitutes a fixture for the purposes of the common law.

Power Rental's purpose in raising the argument was designed to overcome the initial finding of the New South Wales Supreme Court that Power Rental's security interest in several mobile gas turbines, which were leased to Forge Group Power Pty Limited (in liquidation) (receivers and managers appointed) (Forge), had vested in Forge after Forge went into administration as a result of the security interest not having been perfected by the registration of a financing statement on the Personal Property Securities Register (PPSR).

The New South Wales Court of Appeal disagreed with Power Rental's arguments and concluded that:

  1. there is no distinction between what constitutes a 'fixture' for the purposes of the PPSA and at common law; and
  2. the test for determining whether property is a 'fixture' for the purposes of the PPSA is the same as the test at common law.

In our opinion, the decision is unsurprising but does provide judicial confirmation of what was a commonly held understanding.

Key learnings from the Forge appeal include:

  1. Common law considerations for determining whether goods have become a fixture to land will be applied in determining whether personal property is (or has become) a fixture for the purposes of the PPSA. These considerations involve inquiring why, amongst other things, the personal property was brought on the land and the degree to which the goods have been affixed, having regard to factors such as: whether the attachment was for the better enjoyment of the land or the personal property, the nature of the personal property being affixed and whether the affixation was permanent or temporary;
  2. Provisions in agreements (such as that goods will not become fixtures, title will not pass and that goods must be returned at the end of term) are not determinative of whether goods are (or have become) fixtures - it will always be a question of fact applying accepted legal principles to the particular facts;
  3. Electing not to register a financing statement on the PPSR following an erroneous determination that leased goods are (or will become) fixtures will likely be very costly for the financier/lessor; and
  4. If there is any doubt about whether personal property may be considered a fixture, the prudent approach is to both register a financing statement on the PPSR and to obtain a disclaimer of interest in the property from any mortgagee of the land.

Background

Briefly, Forge entered into a contract with Regional Power Corporation, trading as Horizon Power for the design, construction, operation and maintenance of the South Hedland Temporary Power Station in Western Australia. The scope of work under that contract contemplated the lease of gas turbine generators for a fixed term.

Forge entered into a lease with General Electric International Inc (GE) for the gas turbine generators (the Lease). The Lease provided that Forge was responsible for the return of the turbines at the end of term and an acknowledgment that the turbines will remain the property of GE.

GE subsequently sold its business to APR Energy Plc, Power Rental's holding company, and, as a result Power Rental and Power Rental Asset Co Two, LLC acquired the benefit of the Lease.

The turbines were at all relevant times mounted on trailers. However, to ensure the stability of the turbines, "seismic and wind kits" were required to be epoxied into bolts protruding out of the concrete foundation and then bolted to the main trailer on which the turbines sat. Additionally, there was some degree of physical connection between the turbines and the land, as pipelines or conductors were required to deliver the electricity generated from the turbines to the power station's electricity grid.

Neither GE nor Power Rental registered a financing statement on the PPSR in respect of the turbines the subject of the Lease.

Barely one month after Power Rental became lessor, voluntary administrators were appointed to Forge.

Forge argued that the security interest arising under the Lease was unperfected immediately prior to the appointment of the administrators and, as a consequence, the security interest vested in Forge, pursuant to section 267 of the PPSA.

At first instance, Justice Hammerschlag in the New South Wales Supreme Court found that:

  1. the Lease was a 'PPS lease' for the purposes of the PPSA, thereby rejecting the argument that GE was not regularly engaged in the business of leasing goods. (One of the pre-requisites to a lease being a 'PPS lease' is that the lessor must be regularly engaged in leasing goods);
  2. the turbines were not fixtures and were personal property and subject to the PPSA regime. (The PPSA does not apply to interests in land or in fixtures. The PPSA defines a fixture as 'goods, other than crops, which are affixed to land'. The inclusion of a definition of 'fixture' in the PPSA gave rise to a degree of uncertainty as to whether a 'fixture' was something different for the purposes of the PPSA than under common law); and
  3. because the Lease was a 'PPS lease' (and 'PPS leases' are deemed security interests under the PPSA), in order to protect its interests in the turbines, GE and/or Power Rental should have registered a financing statement on the PPSR. Because neither party did so, the security interest was unperfected when administrators were appointed to Forge, and as a consequence, pursuant to section 267 of the PPSA, the security interest vested in Forge.

The net effect of the Justice Hammerschlag's decision was a windfall gain for:

  1. Forge, as the turbines, effectively, became the property of Forge unburdened by any interest of Power Rental; and
  2. Forge's creditors (other then Power Rental) because Forge had more assets, the proceeds of which could be distributed in accordance with the priority regime in the PPSA.

Grounds of Appeal

Amongst other grounds, Power Rental challenged the initial judgement on the grounds that:

  1. the trial judge erred in applying the common law tests for determining whether something was a 'fixture' for the purposes of the PPSA, arguing that a more bespoke inquiry is required in the PPSA context, namely, whether the goods are more than non-trivially attached to the land. If the attachment is non-trivial, the goods were a fixture for the purposes of the PPSA, but not necessarily a fixture for the purposes of the common law;
  2. once installed on the site, the turbines were fixtures for the purpose of section 10 of the PPSA because their attachment was more than trivial and, therefore, the Lease was not a 'PPS lease'. Accordingly, there was no security interest which could vest upon the appointment of administrators to Forge; and
  3. if it was appropriate to interpret fixtures in accordance with the common law, the turbines should not have been found to be fixtures as the trial judge paid no, or insufficient, regard to the purpose of affixation and the physical characteristics of the turbines, all of which pointed to the turbines being fixtures.

The parties submissions

Power Rental maintained that the definition of 'fixtures' for the purposes of the PPSA was bespoke, requiring only an inquiry into whether the goods are physically affixed to the land in a non-trivial manner. Power Rental argued that, if the test is one of physical non-trivial attachment, the evidence plainly demonstrated that the turbines were affixed to the land.

Power Rental argued that the weight and size of the turbines, along with the time taken to install, commission and decommission then, supported the contention that the turbines were fixtures because, while they were movable, they could not be moved month to month. In support, Power Rental drew, and relied heavily on, analogy with tenant's fixtures, which could be fixtures (within the common law meaning) but were able to be removed at the end of the lease term.

In response, Forge argued that Power Rental's favouring of a bespoke meaning for 'fixture' for the purposes of the PPSA would create a new species of interest in goods, that of a 'non-fixture fixture', which would introduce uncertainty and complexity.

In support, Forge referred the Court to various extrinsic materials (including draft papers and commentary prior to the passing of the PPSA), and noted that the fundamental objective of the PPSA was to reduce risk to persons dealing in, and lending money on, the security of personal property. Moreover, Power Rental's interpretation was inconsistent with the legislative purpose as it would create a class of personal property which sat entirely outside of both the PPSA and common law regimes.

Additionally, Forge argued that the inquiry as to whether something was or was not a fixture remained the objective of why the goods were brought on to the land, having regard to the degree and object of annexation.

The Court of Appeal:

  1. endorsed the trial judge's view that the demarcation in the PPSA between land and fixtures on the one hand and personal property on the other supported a construction of fixtures which is based on common law concepts. In relation to the degree that the turbines were annexed to the land, the Court noted that the mode of attachment was one which was intended to be reversible (even though the process of removal might be a "tricky" one);
  2. rejected Power Rental's argument that Justice Hammerschlag had paid no, or insufficient, regard to the factors highlighted by Power Rental, concluding that the trial judge did not place undue weight on the temporary nature of the affixation and the express intention of the parties set out in the Lease and that those matters pointed strongly to the turbines not being fixtures at common law; and
  3. held that, while some inquiries developed by the common law for determining whether goods are fixtures may point in one direction, each case is dependent upon its own particular facts in light of the overall circumstances and, in particular, the degree and purpose of annexation. In this instance, a finding that the turbines were fixtures could not be supported. 

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

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