The Personal Property Securities Act 2009 (Cth) (PPSA) came into operation on 30 January 2012 and is relevant to various aspects of commercial leasing. As we draw closer to the end of the “transitional period” on 30 January 2014, landlords need to ensure that their transitional security interests (i.e. security interests contained in lease agreements that were entered into prior to 30 January 2012) are perfected to avoid losing priority. In the context of a commercial lease, where the relevant property is likely to be in the possession and control of the tenant, the appropriate means of perfection is registration on the online Personal Property Securities Register (PPSR).
Transitional security interests are afforded temporary perfection until 30 January 2014. Following this time, any security interest that has not been perfected by registration on the PPSR will lose its “temporary perfection” status and become an unperfected security interest. Unperfected security interests are afforded the lowest priority under the PPSA and will be defeated by a registered security interest, even ifit came into existence later in time. Furthermore, if the tenant becomes insolvent, unperfected security interests will be unenforceable.
Registrable security interests relevant to commercial leases include:
Leases of personal property
Leases and bailments of goods with a duration in excess of one year are considered ‘PPS Leases’ and should be perfected by registration.
Fittings, furnishings and fitout
Where a landlord purchases items of the tenant’s fitout, if the lease provides that such items remain the property of the landlord, then this gives rise to a security interest under the PPSA. This includes fitting, furnishings and equipment, but excludes fixtures.
Where a fitout incentive payment is provided, such interests will constitute Purchase Money Security Interests (PMSIs) and will enjoy ‘super priority’ over all other registered security interests, even those that are registered earlier in time. However, to qualify as a PMSI, the security interest must be registered within a strict time period, which is typically within 15 business days of the tenant obtaining possession of the property.
A cash security deposit provided by a tenant to secure performance by the tenant of its obligations under the lease is a registrable security interest.
Where deposits are held in an account with an Authorised Deposit Taking Institution (i.e. a bank) (ADI), landlords should consider negotiating a priority agreement with the ADI to ensure that any security interests in favour of the ADI over the account (which are given priority over all other perfected security interests) do not defeat the landlord’s security interest in the account.
Leases often grant the landlord a power of attorney to deal with licences that attach to property, such as liquor licences, in the event of early termination or default. Consideration should be given as to whether such rights create a registrable security interest.
Lease agreements may give rise to a number of further registrable security interests, for example:
- An interest in tenant’s goods abandoned upon termination of the lease; and
- Rights to enter upon leased premises and deal with property upon default.
Notably, bank guarantees and personal guarantees are, in effect, contractual ‘promises to pay’ and do not give rise to a security interest as they do not give the landlord an interest in personal property.