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.

Someone else has possession of my goods; do I need to lodge a PPSR registration against them?

Given the number of statements we’ve seen suggesting that the PPSA ‘completely changes our concept of ownership’ and the horror stories revolving around legal owners losing their property, it is quite natural to explore all the possibilities when it comes to protecting your property under the PPSA.  Should I be lodging a PPSA registration each time my property leaves my possession?

If you are renting warehouse space, if you are having your goods transported by an independent haulier, if you are locating your IT infrastructure off-site, should you be lodging a registration?

The PPSA lists a number of circumstances that may give rise to a security interest where one would not otherwise think in terms of traditional ‘security interests’.  The most common examples for us are, of course, retention of title clauses, consignment stock arrangements and leases; however, under this last category, the PPSA actually uses the term PPS Lease.

A PPS Lease may be a lease or bailment of goods for a year or more or for an indefinite period (section 13 of the Act refers).

Bailment is a common law concept where possession of personal property is transferred from one person (the bailor) to another person (the bailee) for purposes other than the transfer of ownership.  The example often given is where a restaurant or theatre (the bailee) provides an attended cloakroom free of charge to its customer (the bailor) for the safekeeping of their hats and coats.

While there are similarities with Leasing, leasing typically involves the lessee not merely taking possession of the lessor’s property but also making use of it and putting it to the lessee’s own purpose.  The concept behind bailments is more geared to safekeeping.

If we take the example of a business looking to locate their computer servers off-site at a third party’s premises, they are the bailor, placing their intellectual (and physical) property in the possession of another party, the bailee, for their safekeeping.  The arrangement is, presumably intended to be comparatively long term and thus there is, prima facie, a good case for it being treated as a PPS Lease.

However, at s13(2)(b) of the Act we are advised that a PPS Lease does not include a bailment by a bailor who is not regularly engaged in the business of bailing goods.

Our example business is a company engaged in the business of selling widgets thus ‘bailing’ its intellectual property would probably not be an activity associated with its main business.  I’d like to think that such an interpretation would stand up in court but, in the absence of legal precedent in Australia, we have to resort to querying NZ legal cases.  The closest we get in NZ seems to be the case of Rabobank New Zealand v McAnulty in 2011 where it was determined that the owners of a racehorse put out to stud with the bailee were regularly engaged in the business of profiting from their horse rather than engaged in bailments.

The final criteria for a bailment being a PPS Lease occurs at s13(3) wherein it is stated that a bailment will only be a PPS Lease where “the bailee provides value”.

While the computer storage facility will certainly be providing a valued service (that of hosting our business’s servers) I suspect that the Act is intending a much more narrow definition of ‘value’, specifically monetary payment or similar.

So, to summarise:

Our business is likely to be engaged in what might be considered, under common law, as a bailment of their intellectual property to the third party’s off-site computer facility.

This bailment would be deemed under the PPSA as a PPS Lease and thus be registrable on the PPSR provided:

1.            It is for a year or more, or for an indefinite period; and

2.            Our business is regularly engaged in bailing their property; and

3.            The off-site hosting company is providing ‘value’ (possibly payment) in their role as bailee.

While (1) above is probably satisfied, (2) and (3) are probably not, therefore, such an arrangement is unlikely to be registrable under the PPSA.  

It then follows that, if the bailment arrangement does not meet the full criteria for being a PPS Lease, a liquidator attached to the bailee would not be able to vest the bailor’s property as part of the bailee’s assets.

UPDATE: Since May 2017 the eligibility period for a lease or bailment being considered a PPS Lease has increased from 1 to 2 years.  For an indefinite lease or bailment, the PPSA will only apply once the 2 year period has elapsed.

PPSA - Parting with Possession & Bailments

It is funny to think that it wasn’t so very long ago that PPSA experts were trying their hardest to expand everyone’s thinking when it came to security interests – it wasn’t just charges, liens and guarantees, it was also Retentions of Title and Leases.  Well, perhaps the message has been getting home because we’re now seeing requests for advice regarding the registration of collateral whenever it may spend time out of its owner’s possession.

Scenario

LUMBERJACKS have legal title of recently felled trees, they then transfer possession (but not ownership) of those trees to PLANKERS who saw the trees into usable planks of wood and then transfer possession of the wood back to LUMBERJACKS.

LUMBERJACKS have a contractual obligation to make payment to PLANKERS for their value added services.

While it is likely, depending upon the Terms & Conditions agreed to by both parties, that PLANKERS may have a valid security interest in the wood to protect themselves against the possibility that LUMBERJACKS default on their obligation to make payment for PLANKERS’ value added services the question arises as to whether LUMBERJACKS have a PPSA security interest in the wood to protect themselves from the possibility of the wood, while in the possession of PLANKERS, being swept up by a receiver/liquidator appointed to PLANKERS.

In addressing this issue it is useful to set the context by reminding ourselves that the PPSA was established, in large part, to ensure an equitable treatment of security interests.  An applicable security interest under the PPSA is one that uses personal property to secure a payment obligation.

While, for example, a Retention of Title clause included in a supply agreement technically constitutes a statement of ownership, because its effect is to secure a payment obligation it is treated as a security interest and is brought under the auspices of the PPSA.  Similar inclusions have been made for leasing arrangements where a lessor has the right to recover goods in the possession of a lessee in the event of default of the lessee’s payment obligations.

However, in the scenario defined above there is no payment obligation on the part of PLANKERS to LUMBERJACKS and, whilst the goods may be in the possession of PLANKERS their recovery by LUMBERJACKS would be conducted purely on the grounds of ownership rather than as collateral under a security interest and therefore outside the bounds of the PPSA.

A more typical day to day example might be to think of having to lodge a PPSA registration every time you park your car in a car park against the possibility that the car park owners go bust while you are doing your shopping and the liquidators sweep up your car in the process.

Similarly, because the wood in question cannot be deemed a security interest under the terms of the PPSA, any receiver/liquidator appointed to PLANKERS would be unable to use the PPSA to harvest that collateral for the benefit of other creditors.  LUMBERJACKS should thus be able to rely on common law to repossess their own property just as they would have been able to do in a pre-PPSA environment.

Having stated the above, there is provision under the PPSA for a security interest to be created in the case of Bailments. 

A Bailment is formed by delivery of personal property without transfer of title by a bailor to a bailee for a particular purpose giving rise to a duty of care.  Upon completion of the particular purpose the bailee is obliged to return the bailed property (or deal with it as directed).

It could be argued that the arrangement between LUMBERJACKS and PLANKERS constitutes just such an arrangement.

Bailments are included in the PPSA under Section 13 of the act wherein it describes the meaning of a PPS Lease.  I’ve included the relevant section at the end of this article for reference.

In summary, PPS Leases are covered under the PPSA so long as the lease (or bailment) exceeds a defined length of time or, if for a shorter time, can be optionally extended to exceed that defined length of time.

In the case of serial numbered goods (motor vehicles, watercraft, aircraft etc) that defined length of time is 90 days and in all other cases (such as coil steel) is 12 months.

Where the lease or bailment is for a shorter period of time the PPSA does not apply.

Thus, it would appear that in the event of LUMBERJACKS common law rights being 

challenged in this regard there is the additional fall-back position of the PPSA’s applicability being ruled out by the length of the LUMBERJACKS/PLANKERS bailment (presuming PLANKERS take significantly less than 12 months to add their value).

Extract from the Personal Property Securities Act 2009, Chapter 1, Part 1.3, Division 3.

13 Meaning of PPS lease

             (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.

Bailments for value only

             (3)  This section only applies to a bailment for which the bailee provides value.

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