PPSA and Fixtures

Following my last update on the PPSA and its impact on suppliers and distributors of goods, I thought I would explore fixtures in a little more detail.

The exclusion of ‘Fixtures’ from the operation of the PPSA is a matter of great concern, and confusion.  When personal property is affixed to land it ceases to be the subject of a security interest under the PPSA because it forms part of the land and is therefore excluded from the operation of the PPSA.

During a recent presentation I gave on the PPSA and its impact on suppliers and distributors of goods, delegates asked the following questions, highlighting some of the the issues for suppliers and distributors.

Q.  Would the supply of an irrigation system once installed, be regarded as a fixture?

If the irrigation system is in the ground it will be a fixture.  If it is above ground and detachable it probably is not a fixture.  Whether something is a fixture or not depends on tests in the case law.  In summary, an item would become affixed to land when the object and the degree of the annexation means that the item becomes part of the land.

The object or purpose of the attachment is relevant:

• Has the item been affixed permanently or merely for a temporally purpose?
• Has the item been attached to improve the land or buildings on the land or for better use of that item?

The degree of annexation refers to how the item was affixed.  How securely or permanently has it been affixed and the damage that would be caused to the property or the item by its removal.  There is case law that has held that sewer and water pipes, and underground tanks are fixtures.

Q.  Does a vending machine business have to register each machine ID, each location & each client name to protect ownership title to each vending machine?

I assume that the vending machines are leased or hired for a term exceeding 1 year.  The definition of a PPS lease relevantly provides:

‘13(1)    A PPS lease means a lease or bailment of goods:

(a) for a term of more than one year; or

(b) for an indefinite term (even if the lease or bailment is determinable by any party within a year of entering into the lease or bailment); or

(c) for a term of up to one year that is automatically renewable …; or

(d)  for a term of up to one year, in a case in which the lessee or bailee, with the consent of the lessor or bailor, retains uninterrupted possession of the leased or bailed property for a period of more than one year after the day the lessee or bailee first acquired possession of the property …’

If the vending machines are leased/hired to different grantors then a separate security interest will need to be registered on the PPSR in respect of each grantor.  It would be registered under the collateral class of ‘tangible property – other goods’.  It would be prudent to insert in the free text field particulars of the location of each vending machine.

If multiple vending machines are leased/hired to one grantor, and there is insufficient space in the free text field (which takes up to 500 words), an attempt should be made to give the best description possible.  It may be possible to attach a schedule to the registration even though it is not an intention of the PPSR to be a document lodgement system.

Q.   We supply structural timber for houses.  If this then becomes a fixture and part of land, can we protect our interest/ title?  In relation to the supply of timber, what about proceeds?

The timber will become a fixture and as such form part of the land.  The PPSA does not apply to land.

The security interest will attach to the ‘proceeds’ in respect of the sale of the timber when received.  The use of the timber for building purposes necessarily would give rise to either express or implied authorisation that the timber would in effect be disposed of (by becoming a fixture to land) in the same way that goods supplied to a retailer are disposed of when they are sold to a customer.  In this situation Section 32 says that the security interest ‘attaches to the proceeds, unless the security agreement provides otherwise.’

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Impact of the PPSA on distributors and suppliers of goods

Suppliers, sellers and distributors of goods by way of sale or consignment are significantly affected by the changes to property law brought about by the PSSA.  Similarly hirers/lessors of plant and equipment and motor vehicles are immediately affected.

The need to register and the priority of registration provided by the new rules means that people engaged in these industries must not only become familiar with the unfamiliar language but also the new rules that apply which sweep away previously well understood concepts of title to property. 

The exclusion of ‘fixtures’ from the operation of the PPSA

The exclusion of ‘Fixtures’ from the operation of the PPSA is a matter of great concern, and confusion. When personal property is affixed to land it ceases to be the subject of a security interest under the PPSA because it forms part of the land and is therefore excluded from the operation of the PPSA.

Types of security interests

As a distributor and supplier of goods, it is very important to identify whether your relationship with the contractor involves the creation, in substance, of a security interest.

PPSA and retention of title (ROT) clauses

The changes introduced through the PPSA will greatly enhance the position of suppliers and distributors who supply goods through conditional sale agreements containing retention of title (ROT) clauses.  The PPSA now provides:

(a)  that an ROT clause in a conditional sale agreement is a security interest which can be registered on the PPSR;

(b)  not only can the ROT clause be registered as a security interest but it is given a super priority as a PMSI;

(c)  there are now statutory provisions relating to proceeds of sale and tracing proceeds of sale;

(d)  the difficulties of retaining title to goods that are installed in or affixed to other goods, are now the subject of statutory provisions; and

(e)  the PPSA now provides for recognition of security interests in goods that become an unidentifiable part of a larger product or mass.

Leased or hired goods

Leased goods will come within the definition of a PPS Lease.  Leased goods are generally registered under the ‘Tangible Property – other goods’ category of collateral class with a description of the lease provided.  It is also possible to register the leased goods in the collateral class category of ‘Financial Property – Chattel Paper’ which is defined to include a ‘security interest in, or lease of, specific goods’.

Special provisions relating to motor vehicles

Because of the risk of title in a motor vehicle being passed to a third party, it is essential that the motor vehicle be registered by its vehicle identification number, chassis number or the manufacturer’s number. Wherever serial numbers are available, they should be included in the Financing Statement.  This also applies to leased goods such as trailers, caravans, generators etc. which fall under the PPSA’s definition of a motor vehicle.

Summary

ROT clauses in conditional sale agreements should be enforceable against customers and third parties – register ROTs on the PPS Register.

Check the terms of the lease/hire arrangement to determine whether it is for a term of more than 1 year or for an indefinite term and therefore a ‘PPS Lease’.  Take steps to ensure that the lease/hire arrangements are registered on the PPS Register

If the registration is for a period of 7 years (and there is a possibility that the registration may need to be extended) then a diary note should be made to amend the registration by lodging a financing change statement prior to the end of the 7 year term. 

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PPSA Seminar: How is it impacting your business?

At this week’s Personal Property Securities Act seminar (Wednesday 16 May 2012 in Sydney), we will be looking at how the PPSA impacts business. During the presentation we will cover a number of case studies which highlight various scenarios and the PPSA issues (each case study is set out below).  I will provide an update on these after the seminar, however, if you have any questions please feel free to post them in the comments section below and I will endeavour to answer them at the seminar and in a follow-up blog

Case One – Manufacture and Supply
ManufactureCo manufactures cupboards which can either be free standing units or incorporated into a kitchen design. The basic components which make up the cupboards include:

• Particle board panels (covered in melamine) made up of sugar cane particles pressed together with resin – manufactured by PanelCo under an agreement with an ROT clause;
• The resin is supplied by ResinCo under a similar agreement with an ROT clause;
• A door with a handle; and
• Hinges to attach the door to the panels – the hinges are supplied by HingeCo under a similar agreement with an ROT clause.

ManufactureCo provides these cupboards to RetailCo and KitchenCo under a similar agreement with an ROT clause. KitchenCo supplies these cupboards in kitchens of commercial premises whilst RetailCo sells to the public. Each company registers its security interest in the ROT clause on the PPS Register, except for PanelCo. ManufactureCo then goes into liquidation

How does the PPS Registration or non-registration affect the suppliers’ competing claims?

Case Two – Subsequent Supply
Using the ‘cupboard’ example, consider whether the registered security interests are effective to retain security in the cupboard where:

• HingeCo supplies hinges to ManufactureCo pursuant to an ROT clause and registers its security interest in the supply agreement on the PPSA;
• PanelCo supplies panels to ManufactureCo but does not register its security interest in the ROT clause on the PPS Register;
• ManufactureCo registers its security interest in the cupboard contained in the supply agreement between ManufactureCo and RetailCo (although its name does not appear anywhere on the cupboard as the manufacturer);
• ManufactureCo supplies the cupboards to KitchenCo and registers its security interest in the supply agreement on the PPSR;
• RetailCo sells the cupboard to a customer; and
• KitchenCo installs the kitchen cupboard into commercial premises (e.g. TressCox Kitchen);
• ManufactureCo goes into liquidation.

Case Three – Dry Hire
HireCo hires out mobile cranes to large building projects. HireCo puts a crane on DeveloperCo’s land but fails to register a security interest in the hire agreement on the PPS Register. DeveloperCo then:

• Sells the crane in breach of the terms of the hire agreement to PurchaserCo;
• DeveloperCo appoints a voluntary Administrator.

What is the outcome in these two scenarios?

Case Four – Wet Hire
LeaseCo leases earth moving equipment to the Contractor for the purpose of excavating a building site prior to construction. The excavator is a ‘motor vehicle’ by definition with a serial number. As part of the hire agreement, the hirer must supply both fuel and driver for the excavator. The excavator is used between 7.00am and 4.00pm, and then left on site until the driver returns the following morning. The security interest is not registered on the PPS Register. One fateful day at 5.00pm, the hirer appoints a voluntary Administrator, and at 7.00pm that same night, the Administrator takes possession of the building site.

Does the title to the excavator vest in the hirer by operation of section 267 PPSA?

It is not too late to register for the Personal Property Securities Act Seminar.

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Australia’s New Super Security Register – The PPSR: How It Could Affect Your Medical Practice

The Personal Property Securities Register (PPS Register) established under the Personal Property Securities Act 2009 (Cth) (PPSA) is the most significant reform to Australia’s business landscape since the Trade Practices Act, which established the ACCC and unfair trading laws, was passed in 1974. The PPS Register commenced on 30 January 2012.

A basic understanding of it is now essential for anyone doing business in Australia, so what could it mean for medical practitioners?

Firstly, a primer on the concept of security. All readers will be familiar with the purpose of mortgages, which are given as security over your house to protect your lender in the event you are unable to repay your home loan. The key commercial imperative for any type of security is that it protects the lender in the event they are not repaid, by providing them with another means to get their money back, e.g. by selling your house.

The reason for the PPS Register is that many businesses, not just lenders, take security over things other than land. Medical practitioners who are used to having to purchase on credit or lease medical equipment to run their practice will be familiar with the concepts of chattel mortgages, and also company charges, when making large financial commitments.

Until now Australia has never had a single register for such securities. Instead, there has been a confusing patchwork of some 40 State and National registers operating under approximately 70 separate Acts, including ASIC’s Company Charge Register and REVS (Register of Encumbered Vehicles). Lawyers and the courts became involved in the resulting disputes over who got paid from what assets and in what order.

The PPSA replaces all of that with a single online register available to the public 24/7.

The PPSA does not apply to land and certain statutory licences. It applies to most other tangible and intangible property, including motor vehicles; household, commercial and industrial goods and equipment; business inventory; intellectual property rights, financial instruments and company shares.

Under the new system, ‘security interests’ now include contractual arrangements that were not previously regarded as security, including leases, supply on retention of title terms, hire-purchase arrangements. When you lease, borrow, or purchase any type of goods on credit, whether for your practice or for domestic purposes, it is likely a security interest will arise. Registration on the PPS Register is now essential to protect one’s security.

If they have not been already, it is likely medical practices will be approached by suppliers and lenders about documenting new terms of supply and registering their security interests on the PPS Register.

If you wish to learn more about the PPS Register, we suggest consulting the Government’s PPSA website and secondly your lawyer or accountant for any business or transaction specific enquiries.

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PPSA and Property Acquisitions & Leases

During a seminar I presented on the PPSA and Property transactions and leases, the following questions were raised:

Q.  We have an Assignment for lease for a shop which includes shop fittings. Does this fall under the PPSA?

This is what’s referred to as a PPS Lease and as such, you should register it on the PPS Register by lodging a Financing Statement.  If the lease is assigned, there will be a change in possession of the shop fittings and a new Financing Statement noting the assignee as the grantor should be lodged.

You may be also interested in reading this article ‘Fixtures and the Personal Property Securities Act: maintaining the status quo’ which outlines the Common Law position on fixtures and the lessons from the Canadian and New Zealand regimes.

Q.  Do we need to consider architectural plans and Development Applications (DAs) when purchasing a commercial property?

Architectural plans and DAs do fall within the definition of personal property and may be subject to a security interest.  If these are included in the purchase of the property, you should search the PPS Register to see if they are subject to a security interest. 

Q.  How will a release of a security interest usually be effected on the settlement of a purchase?

The Australian Bankers’ Association has prepared a standard form to provide as a discharge on settlement.  It is executed by the secured party, being the bank, and provides a release and an undertaking to amend the PPS Register within 10 business days.

Q.  If you are selling a property is the PPSA relevant?

The security interests in the personal property involved should be considered and appropriated special conditions included in the sale contract.

Some general tips in regards to Property acquisitions and Leases:

Existing commercial leases of land and personal property – The transitional period provides for deemed registration or perfection for certain security interests existing prior to 30 January 2012 and this is likely to include commercial leases of land and personal property.  This protection ends with the end of the transition period on 30 January 2014.  All existing commercial leases should be reviewed and registered where necessary.

Commercial Leases and abandoned goods – It may be useful for landlords to draft provisions in commercial leases for a security interest for goods that the landlord wishes to retain on default.

Developers – Building sites have a lot of collateral which is subject to the PPSA. Building materials, machinery, hired equipment, cranes, scaffolding, portable buildings etc. will be supplied by third parties to the developer.  Suppliers will (or should) have a registered interest until the collateral becomes a fixture.  Developers should review contracts to ensure progress payments are subject to materials becoming fixtures.

Building contracts and step-in rights – Where building contracts include step-in rights it may be useful for the principal to take a security interest in those rights and register them in the PPS Register.

These are just a few of the issues raised.  If you have further questions about how the PPSA affects Property and Leasing transactions, please let me know.

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