Does an Agistment give rise to a Security Interest?

26 Apr 2013

Types of agistment

An agistment is when you let someone graze their stock on your land for reward.

Normally an agistment is a bailment. A bailment is simply where one person (the bailor) gives possession of goods, such as stock, to another person (the bailee), and the bailor has the right to receive the goods back. When the agistment is a bailment, the stock owner does not have a right to occupy the land and is not responsible for looking after the stock.

An agistment can also be in the form of a licence or lease of land rather than a bailment. This will be the case when the stock owner has the right to enter the land and to look after the stock.

PPSA

Under the Personal Property Securities Act 2009 (Cth) (the PPSA), some kinds of bailment interests are security interests governed by the PPSA. If an agistment falls within this class of regulated bailments, the interest of the stock owner will be a security interest under the PPSA. If it is a security interest, the stock owner may want to register the interest under the agistment on the Personal Property Securities Register (the PPSR), to preserve the priority of the owner’s interest in the stock.

PPS leases

The PPSA says that the type of bailment interest that is a security interest is the interest of a bailor of goods under a “PPS lease.” Therefore an agistment arrangement would need to be a “PPS lease” in order to qualify as a PPSA regulated bailment.  

A PPS lease is a special type of security interest under the PPSA called a purchase money security interest, or PMSI for short. A security interest registered as a PMSI on the PPSR will in some cases have priority over prior-ranking registered security interests.

A bailment of stock will be a PPS lease if it meets certain conditions.

Term of bailment

To be a PPS lease, the bailment must be for a term of more than one year, or an indefinite term. It will also be sufficient if it has a term of up to one year that is automatically renewable, or that is renewable at the option of one of the parties, for one or more terms, if the total of all the terms might exceed one year.

Even if the term is one year or less, if the bailee, with the consent of the bailor, retains uninterrupted or substantially uninterrupted possession of the bailed property for a period of more than one year after the day the bailee first got possession of the property, this will meet the bailment term requirement, although not until the bailee’s possession extends for more than one year.

Bailor must be regularly engaged in business of bailing goods

However, a bailment that meets these requirements will not be a PPS lease if it is a bailment by a bailor who is not regularly engaged in the business of bailing goods.

Rabobank New Zealand Ltd v McAnulty [2011] NZCA 212 is a recent New Zealand case where a similar provision in the New Zealand PPSA was considered.  There was one-off bailment of a race horse with a stud farm. The court held that this was a lease or bailment by a lessor or bailor who was not regularly engaged in the business of leasing or bailing goods. The court said that the words “the business of leasing goods should be read as importing a requirement that the owner actually be intending to profit from the bailment or lease.”  The court also said that “a single transaction in circumstances where it can be established that the transaction was a one-off would not be regular.”

If the stock owner is not regularly engaged in the business of bailing stock, intending to profit from the transaction, the agistment will not be a PPS lease.

Bailee must provide value

In addition, a bailment will only be a PPS lease if the bailee provides value – that is, where the bailee provides something of value for taking possession of the goods. Under an agistment, the landowner provides something of value to the stock owner: the opportunity to graze the stock on the land. An agistment should therefore normally meet this condition.

Summary

In summary, an agistment will give rise to a PPSA security interest where:

  • it is a bailment (rather than a lease or licence);
  • the bailment is for a term of more than one year or an indefinite term;
  • the bailor (the owner of the stock) is regularly engaged in the business of bailing goods (such as stock); and
  • the bailee (the owner of the land) provides value for the bailment.

 

For further information please contact dwyerp [at] kempstrang [dot] com [dot] au (Patrick Dwyer), Partner. 

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