Personal Property Securities Amendment (PPS Leases) Act 2017
On 20 May 2017 amendments commenced to section 13 of the Personal Property Securities Act 2009 (Cth) (PPSA) to reduce red tape and regulatory risks associated with registering short term or 'indefinite term' PPS leases on the Personal Property Security Register (PPSR).
What has changed
The timeframes for registering PPS leases have been extended and clarified.
To require registration as a PPS lease on the PPSR a lease or bailment of goods (that otherwise satisfies the requirements for a PPS lease) entered into after 20 May 2017:
- must have a minimum term of more than two years (increased from a term of more than one year);
- will no longer be deemed to be a PPS lease if it is for an 'indefinite term' unless and until it runs for a period of more than two years. That is, leases (and bailments) with no fixed end date can be registered towards the end of the two year period instead of needing to be registered at the start;
- that is renewable either automatically or at the option of one of the parties must be for a combined period in excess of two years (increased from over one year); and
- that is for a shorter-term arrangement of up to two years the lessee or bailee must retain uninterrupted possession (with consent) for more than two years (increased from more than one year).
Leases or bailments entered into before the amendments commenced are unaffected by the changes.
Implications for the construction industry
Given that a failure to register a lease in time can result in loss of priority against other secured parties, a third party taking the property free of the security interest or loss of the security interest in the event of insolvency, the changes provide greater protection and flexibility to companies engaged in the business of leasing goods.
Despite the extra comfort that the changes bring, it remains unclear whether a lease that did not start out as a PPS lease but later becomes a PPS lease after two years will vest in the grantor in the event of the grantor's insolvency if the security interest has not been registered within 6 months before the day on which the winding up began or 20 business days after the security agreement commenced as required by section 588FL of the Corporations Act 2001 (Cth). Further questions arise as to whether a PPS lease will retain the benefit of 'super-priority' as a purchase money security interest (which it would otherwise be afforded) if not registered within 15 business days of the lessee (or bailee) taking possession of the equipment or goods (and not two years later) as required by section 62 of the PPSA. For best protection, any hire arrangement should continue to specify if the term of the hire is intended to be more than two years and outline the scope and time for any extensions. Caution should also be exercised in assessing whether an agreement for lease or bailment of property creates a term of two years from its creation as distinct from the lessee or bailee having possession. Registrations should continue to be made in a timely manner.
Importantly, the amendments do not modify the operation of the PPSA in relation to leases which are 'in-substance' security interests.
While a PPS Lease will typically apply to goods intended to be delivered back to the owner after the term of the hire has finished, an 'in substance' lease under section 12(1) of the PPSA arises where a transaction secures payment or performance of an obligation and the lessee becomes the owner of the goods once the terms of the lease have been fulfilled. Notably, a lease may be a PPS lease and an 'in-substance' lease.
For construction companies in the business of hiring or leasing goods understanding the differences between 'in substance' leases and PPS leases will be even more important following the changes in registration timelines in order to perfect their security interests and protect title to equipment.