The Personal Property Securities Act 2009 (PPSA) is due to commence operation in October 2011 and will dramatically change Australia’s commercial law landscape. Procedures that are now second nature will no longer be relevant - new systems, new rules and new problems are coming.
Although the PPSA is directed at personal property, there may be unexpected issues that will arise in the application of the PPSA to real estate transactions.
PPSA and real estate
The PPSA applies to security interests in personal property and sets up a brand new system of registration, priority and enforcement. The PPSA creates new rules about when a person will have an interest in personal property and how this can be enforced against others. The priority of a security interest can be perfected by registering the interest on the new PPSA register or by having control or taking possession of the relevant property. Without this perfected interest a security holder will be vulnerable to the claims of other parties who, although they may have obtained an interest later in time, have a better claim because they have perfected their interest.
Security interests that will be affected include leases, bailments, retention of title arrangements, sales of receivables and intangible assets and other arrangements that may not necessarily be thought of as security interests. Although the effects of this seem anomalous, deposits received under contracts of sale are also likely to be considered a security interest for the purposes of the scheme.
While the PPSA and its systems and rules will not apply to real estate, transactions which are primarily concerned with real estate may nevertheless be impacted by these significant reforms and market participants need to be ready to adapt to these changes. For example, any property financing transaction where a financier is taking security over rent accounts, goods located on the property or IP connected to the business conducted on the property will involve PPSA issues.
What about fixtures?
The PPSA will not apply to an interest in fixtures. A lease of land is excluded from the PPSA and so is any lease of fixtures on that land. However, to the extent that a lease of land also includes a lease of goods, this will be a PPSA security interest which must be registered in order to protect the secured party’s interests.
For example a lease of a industrial warehouse will not be subject to the PPSA. However, if the leased property includes items of plant and equipment that are owned by the landlord and are not fixtures, the lease of those items may be regulated by the PPSA. If the landlord does not register its interest it runs the risk of a person with a security interest registered against the tenant, or a liquidator of the tenant, having a superior interest in those items even though the landlord is the owner of the goods. A common case in which this issue could arise is where the landlord agrees, at the tenant’s request, to “own” the fitout that is paid for with an incentive made available to the tenant.
Retention of title will be a registrable security interest
Goods are often supplied to customers on a retention of title basis - title to the goods remaining with the supplier until payment has been made for those goods. This protects against the risk that the customer becomes insolvent before payment, requiring the seller to compete against other creditors claiming an interest in those goods. In major construction projects, materials are often delivered to the site on a retention of title basis.
A retention of title clause in a supply contract will now be a security interest registrable under the PPSA. For a construction project where building materials are supplied on a retention of title basis, if the arrangement is not registered and the builder becomes insolvent, other parties with a registered security interest over the builder may be able to claim an interest in the goods in priority to the supplier.
No more Form 312
While Forms 312 under the Corporations Act (Notification of discharge or release of property from a charge) are currently used to remove prior encumbrances, there is no mechanism to register a release under the PPSA (although the register can be amended by lodgment of a financing change statement).
If there has been a partial release of a security the register will not necessarily contain this information. Instead an interested party will now need to confirm the release directly with the security holder. We anticipate this will be done by way of a deed of release from the security holder, which can then be provided to the interested party.
There is a transitional period
The PPSA will commence with a 2 year transitional period, from October 2011. This will give parties an opportunity to register their existing security interests on the PPSA register. Existing interests that are already registered with ASIC, such as fixed and floating charges, will be automatically transferred on commencement and so do not need to be registered again. It is vital, however, if parties wish to perfect existing interests that would not have previously been registrable, that these are identified and procedures implemented to register these under the PPSA.