Personal Property Securities Act – register or regret

State and local governments have large asset portfolios and enter hundreds – if not thousands – of property dealings every year. The Personal Property Securities Act 2009 Cth (the Act) has critical implications for common property transactions.

Government property owners:

• need to be alert to the real risk of losing title to goods if appropriate steps are not taken to protect the government’s interest in its goods when entering leasing arrangements;
• should take appropriate steps to ensure that it has first priority in any cash bond taken as security under transactions; and
• must ensure that clear title is obtained when a government acquires goods.

Failure to take into account the Act may be a failure to protect public assets.

The Act applies widely to all ‘personal property’ – essentially any property except land, fixtures to land, water rights and some statutory licences.

Below are some common scenarios which are impacted by the Act.

Leasing transactions

The Act deems ‘PPS leases’ a security interest. Broadly speaking, a PPS lease is a lease or bailment of goods for a term of more than 2 years[1] by a landlord regularly engaged in the business of leasing or bailing of goods.

While the Act does not apply to leases of land or fixed buildings, often governments lease goods as part of property dealings. For example, a lease of part of an office building may include fitout or furniture, or large equipment such as cranes may be located at industrial premises.

In order to protect the government’s interest in the leased goods, a security interest must be registered on the personal property securities register (PPSR). There are very short and strict timeframes for registering a security interest on the PPSR, which vary depending on the nature of the transaction.

If the leased goods are further dealt with (for example assigned or subleased), additional or replacement security interests may need to be registered on the PPSR.

If you fail to register a security interest within the prescribed timeframes, there is a risk that the government will lose title to its goods in a number of scenarios including if:

• the tenant sells those goods to a third party, for example, on the sale of its business and assignment of its lease; or
• an administrator or a liquidator is appointed to the tenant or a deed of company arrangement is entered into in respect of the tenant.

In one recent case, assets worth tens of millions of dollars were lost by the owner due to a failure to register a security interest.

Cash bonds

Government agencies are increasingly looking to take cash bonds as security for meeting obligations (such as rehabilitation costs) associated with licences or approvals.

Under the Act, personal property includes ‘cash’ and bank deposits. If a cash bond is taken under a transaction as security for the performance of an obligation, a security interest may need to be registered.

Again, there are strict timeframes for registering that security interest. Additionally, either a release of prior registered security interests may be required or a priority arrangement may need to be entered with prior registered secured parties, to ensure the government has first priority to the cash.

Acquisitions

When acquiring personal property, in order to obtain clear title, in many cases governments need to obtain appropriate releases of all registered security interests that attach to the property. A failure to obtain a release may mean the registered secured party retains its interest in the property.

Most provisions in the Act cannot be contracted out of and you need to consider each transaction on a case by case basis.

Key takeaway

Having regard to the examples above, it is important for government agencies, with an interest in ‘personal property’, to ensure that they have adequate processes in place to safeguard against losses associated with a failure to register a security interest.

[1] A PPS lease includes leases where the term is less than 2 years but is automatically renewable or contains an option to renew the lease for more terms if all terms might exceed 2 years. A PPS lease also includes leases for up to 2 years or a lease for an indefinite term where the lessee or bailee, with the consent of the lessor or bailor, retains substantially uninterrupted possession of the property for a period of more than 2 years (but not until the lessee’s or bailee’s possession extends for more than 2 years).

Authored by:
Gail Black, Partner