PPS Leases – Extended to 2 years

I wrote on this issue in March when the Government’s Bill to extend the qualifying period for PPS Leases to 2 years passed its first reading.  I was sceptical at the time as to how swiftly we could expect the Bill to be enacted and come into effect but clearly, those lobbying for the changes carry some serious clout because Royal Assent took place on 19^th May and the terms of the Act are now in force.

While, superficially, the Act has merely served to double the qualifying period for leases to get caught up by the PPSA, more tellingly, the Act also keeps indefinite leases out of the PPSA’s claws until such time as the lessee’s actual possession of the leased property passes the 2 year mark. 

This is, by far, the more meaningful change and it will almost certainly be welcomed by all the small hire operations that don’t expect to hire their goods out for much more than a few days or weeks yet fail to put an expiry period on the lease. 

However, the relief that no doubt comes from not having to worry about the administrative burden of the PPSA may be offset by the corresponding loss of protection that having their leasing arrangement treated as a security interest allowed. 

Loss of protection from Preference demands

Under the PPSA, property being leased is treated as collateral in a security interest that would allow the lessor to recover their property in the event the lessee failed to continue making payments under the lease.  Up until now, a lessor will have been able to use the presence of this ‘security interest’ (provided it was properly registered) as a defence against any claim from a liquidator that monies paid under the lease should be returned as preferential payments. Under this new Act, it is difficult to see how a lessor (for an indefinite lease that has yet to run for 2 years) would be able to use that defence.

Loss of PMSI ‘super priority’

In order to be eligible for PMSI super priority where the collateral being used is designated as a non-inventory item, the perfecting registration must be lodged within 15 business days of the lessee taking possession of the property.

However, where an indefinite lease is concerned and the lessor doesn’t lodge their registration until it becomes clear the lease may extend beyond the new 2 year qualifying period, that 15 business days period may long since have passed leaving the lessor’s claim to their equipment to fall behind those of other general security holders with registrations already in place.

I notice that the Hire and Rental Industry Association (HRIA) has, rather dangerously, advised its members that registration within the PPSA designated timescale won’t be necessary in order to get PMSI priority; unfortunately, its explanation as to why this might be isn’t especially convincing.

It would have been far better for the new Personal Property Securities Amendment (PPS Leases) Act to have also adjusted the PMSI designation timescales to accommodate these changes and remove any doubt.

Vesting under the Corporations Act

Regardless as to how the PPSA might be interpreted, the Corporations Act, at s588FL, clearly states that…

If a registration has been lodged during the 6 months leading up to the appointment of a liquidator, it must have been lodged within 20 business days of the security agreement coming into force in order to avoid the collateral in question being vested with the liquidator.

Basically, if a registration isn’t lodged within 20 business days of the leasing agreement being entered into, the lessor has to keep their fingers crossed that a liquidator doesn’t get appointed to the lessee during the 6 months following their eventual registration.

If anyone gets a little lost at this point, I have a visual here that should help.

The PPSR, in explaining the implications of the new Act, suggests registering at 22 or 23 months into the leasing period, but this clearly won’t help lessors avoid falling foul of s588FL.

Fortunately, the HRIA recognises the danger that those at the PPSR clearly don’t and recommend that registrations be lodged before 18 months have passed if it looks as though the lease might go on for longer than expected.  Where there is already an expectation that the lease could last longer than 2 years, they recommend registering at the outset.

This seems a sensible workaround but, with proper prior public consultation and better thought out legislation, there should be no need for ‘workarounds’!

Summary

Leases and bailments entered into after 20 May 2017 will be subject to the new definition of PPS Leases and such leases will not need to be registered on the PPSR unless they are to run for longer than 2 years.

Agreements entered into before 20 May 2017 will remain subject to the previous definition of a PPS Lease and should still be the subject of a PPSR registration if they are due to run for longer than a year, allow for extensions taking the agreement beyond a year, or are for an indefinite period.

Update: Please see my post on "When does a Grantor take possession?" for some fresh thinking on some of the issues/concerns raised in this post.

PPSA Amendment Finally Passes! [UPDATED]

Back in March 2014, I wrote about a Bill being put before Parliament to do away with the two tier system the PPSA had introduced whereby leasing arrangements were treated differently depending upon whether they involved serial numbered equipment (eg, motor vehicles and watercraft) or non-serial numbered equipment (eg, everything else).

That article, giving some background to the Bill and its implications, can be found here.

Finally, towards the end of last month, that Bill, the Personal Property Securities Amendment (Deregulatory Measures) Bill 2014, was passed.  While the approximately 15 months wait to get this approved won't be good news for those looking for swift implementation of any of the 394 recommendations included in the recently completed review of the PPSA, it will be good news for those businesses regularly engaged in the of hiring vehicles for periods of less than a year.

The Government has estimated that bringing the hiring of motor vehicles into line with the hiring of any other piece of equipment will save business over $11 million a year - whether that is based purely on the saving of registration fees or also includes the administrative costs involved in preparing and lodging a registration is not clear.

The good news, however, won't be felt just yet.  The Act needs to receive Royal Assent before it can be introduced and such introduction may take up to a further 6 months from that point.  

[UPDATE: An announcement by the PPSR today (28/08/15) advises that "The Government is working toward commencement of the amendment on 1 October 2015."]

Any leasing arrangements entered into before the, yet to be announced, amendment commencement date will still need to be registered in accordance with the 'old' rules but after that date, a great many small and medium sized businesses will have found themselves released from an annoying strand of red tape.

Just to reiterate - at present, if you are leasing a motor vehicle (or equipment that might fall under the Act's rather broad definition of motor vehicle) where the period of the lease falls into one of the following categories:

a) a term of more than 90 days; 
b) for an undefined period that may be construed as allowing for a hire extending beyond 90 days; or 
c) for any other period that allows, via automatic or optional renewal, extension to a total period exceeding 90 days.

A PPSR registration is necessary to prevent your property being taken as part of your customer's estate in the event a liquidator is appointed.

After the new amendment comes into force, the rules for motor vehicles will be just the same as for any other hired equipment:

a) a term of more than 12 months; 
b) for an undefined period that may be construed as allowing for a hire extending beyond 12 months; or 
c) for any other period that allows, via automatic or optional renewal, extension to a total period exceeding 12 months.

Any standard leasing arrangement that falls outside of any of the above situations need not register and need not run the risk of a liquidator taking possession of your equipment.

PPS Leases

Earlier this week I was asked to explain to one of our clients the position the PPSA takes on Leasing and Hiring arrangements. In particular the client wanted clarification on the duration of leasing arrangements and gave, as an example, the situation where “some customers hire our machines for 2 months but then decide to just keep them for 5 months”.

Firstly, I should probably explain that leasing and hiring arrangements fall into a similar category to Retention of Title arrangements in that they do not technically involve the creation of a security interest but rather clarify an ownership position and the rights of the hirer/supplier to recover their property in the event of any breach of contract on the part of the lessee/buyer. With the PPSA's emphasis on substance over form the rights of a leasing company to recover their property is treated as a security interest and is now covered under that Act.

PPS Leases are defined under Section 13 of the PPSA (the wording for which I’ve included at the end of this article should anyone enjoy reading that sort of thing).

Briefly, for goods that are required under the Act to be described by serial number (primarily motor vehicles, watercraft, aircraft etc) registration is appropriate where the lease is for 90 days or more or where the lease is for a shorter period but allows for being renewed or extended to such an extent that the total lease period extends beyond 90 days.

For goods that are not required to be described by serial number the cut-off requirement for registrations extends to periods of 12 months (or shorter periods that allow for extensions/renewals which would take the overall period beyond 12 months). 

Hirers (and other suppliers) should be aware that when the Act refers to serial numbered goods it is referring to specific types of goods.  Most goods have serial numbers stamped on them somewhere if you look hard enough; however, only those stamped on motor vehicles, watercraft, aircraft etc count as far as the Act is concerned.

It should also be noted that while most of us think we have a pretty good handle on what constitutes a ‘motor vehicle’ the PPSA extends the ‘normal’ interpretation to include, for example, “a piece of machinery or equipment that is equipped with wheels and designed to be attached to, or towed by, a motor vehicle” (see below for the PPSA Regulations Act's definition).

If we use our client’s example scenario, “some customers hire our machines for 2 months but then decide to just keep them for 5 months” – if the goods in question are required to be registered by serial number and the lessee is entitled under the lease agreement to extend the lease in that fashion then our client would be advised to register their security interest in the goods on the PPSA Register and should do so at the outset.  My advice in these and other situations is that it is better to have a registration you don’t need than to need a registration you don’t have.

PPS Leases are able to be registered as Purchase Money Security Interests (PMSIs) which give the lessor a greater priority in their security than holders of general security interests.  For this to be effective the registration must be lodged within 15 business days of the lessee taking possession of the goods or, where the goods will be used as inventory, before the lessee takes possession of the goods.

As I threatened at the outset, the PPSA’s definition of PPS Leases is as follows:

(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 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; 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 (or substantially 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 (but not until the lessee’s or bailee’s possession extends for more than one year); or

                     (e)  for goods that may or must be described by serial number in accordance with the regulations, if the lease or bailment is:

                              (i)  for a term of 90 days or more; or

                             (ii)  for a term of less than 90 days, but is automatically renewable, or is renewable at the option of one of the parties, for one or more terms if the total of all the terms might be 90 days or more; or

                            (iii)  for a term of less than 90 days, in a case in which the lessee or bailee, with the consent of the lessor or bailor, retains uninterrupted (or substantially uninterrupted) possession of the leased or bailed property for a period of 90 days or more after the day the lessee or bailee first acquired possession of the property, (but not until the lessee’s or bailee’s possession extends for 90 days or more).

             (2)  However, a PPS lease does not include:

                     (a)  a lease by a lessor who is not regularly engaged in the business of leasing goods; or

                     (b)  a bailment by a bailor who is not regularly engaged in the business of bailing goods; or

                     (c)  a lease of consumer property as part of a lease of land where the use of the property is incidental to the use and enjoyment of the land; or

                     (d)  a lease or bailment of personal property prescribed by the regulations for the purposes of this definition, regardless of the length of the term of the lease or bailment.

The PPSA Regulations (a separate act to the PPSA itself) holds the following definition of Motor Vehicle:

Meaning of motor vehicle

         (1)   For the definition of motor vehicle in section 10 of the Act, personal property described in sub regulation (2) or (3) is a motor vehicle.

         (2)   The personal property:

                (a)    is built to be propelled, wholly on land, by a motor that forms part of the property; and

               (b)    either:

                          (i)    is capable of a speed of at least 10 km/h; or

                         (ii)    has 1 or more motors that have a total power greater than 200 W; and

                (c)    has any of the following:

                          (i)    a vehicle identification number;

                         (ii)    a chassis number;

                        (iii)    the manufacturer’s number; and

               (d)    does not run on rails, tram lines or other fixed path.

         (3)   The personal property:

                (a)    is capable, when being towed by, or attached to, a motor vehicle, of travelling at a speed greater than 10 km/h; and

               (b)    is a piece of machinery or equipment that is equipped with wheels and designed to be attached to, or towed by, a motor vehicle; and

                (c)    has any of the following:

                          (i)    a vehicle identification number;

                         (ii)    a chassis number;

                        (iii)    the manufacturer’s number.