Client Update: The PPSA and real estate transactions
5 March 2012
In brief: Despite the Personal Property Securities Act 2009 (Cth) not applying to 'land' or 'fixtures', it will nevertheless impact on the leasing, and buying and selling, of real estate. Additionally, some uncertainty as to whether 'fixture' under the PPSA was meant to follow the common law meaning confuses the breadth of operation of the Act in this area. Partner John Gallimore (view CV) and Senior Associate Alister Fitzgerald report.
- PPSA – a new regime
- Meaning of 'fixtures' uncertain
- Contracts of sale
- Landlord due diligence on pre-PPSA leases
- Standard documentation
The Personal Property Securities Act 2009 (Cth) (the PPSA) commenced on 30 January 2012 and completely overhauls the previous common law and statutory regimes dealing with security interests in personal property. It introduced a national (online) system for the registration of security interests and rules for determining priority in relation to competing security interests in an item of personal property. By its definition of 'security interest', the PPSA also broadens the traditional concept of a 'security', to encompass interests in personal property that in substance secure the payment of money or the performance of an obligation. The PPSA also contains rules that affect when a security interest is enforceable, how it can be enforced, and when a security interest can be extinguished.
Such broad and substantial change potentially alters many settled legal principles relating to common security interests and does so in a way that creates some uncertainty as to the ambit of the PPSA. Care needs to be taken when considering relevant issues.
Circularity in some definitions – including 'land' and 'fixtures' (to which the PPSA is stated not to apply) – leave it unclear whether 'fixtures' under the PPSA has the same meaning as at common law, or some narrower meaning that would have the effect of broadening the application of the PPSA to include some property traditionally accepted to be fixtures.
- A security interest will arise in respect of landlord fitout, to the extent that fitout is not a PPSA 'fixture', in premises leased for one year or more or for an indefinite period.
- Landlords will need to register these security interests within strict timeframes if they wish to avoid (among other things) the risk of ownership of the relevant fitout passing to any controller of the tenant's assets in circumstances where the tenant enters into an insolvency regime.
- In addition, uncertainty as to the meaning of 'fixture' under the PPSA could mean, on one interpretation, that a security interest of this type arises in respect of all landlord fitout.
- Even if this interpretation is not correct and items that were traditionally fixtures continue to be 'fixtures' for the purpose of the PPSA, many items in modern fitout might still comprise 'personal property', which may justify registration of the security interest that arises in relation to that fitout in any event.
- These and other PPSA issues will also need to be taken into account when drafting documentation relating to landlord fitout.
Financing of fitout by tenants will, under the PPSA, usually be more transparent, and financiers are likely to request more sophisticated 'Right of Entry' or 'Landlord Waiver' documentation with landlords.
Tenant security deposits
A security interest could arguably arise in favour of both a landlord and tenant in respect of a tenant security deposit, where the landlord holds the deposit on trust and the lease is of premises and personal property. This personal property might comprise loose chattels in the leased premises or other items (such as relevant parts of landlord fitout) that do not comprise 'land' under the PPSA.
In addition, any security interest that does arise in relation to a tenant deposit, even if perfected by registration within the prescribed timeframes, will rank behind any prior registered security interest (such as 'all assets' security in favour of a financier of either party).
Having regard to these factors, until it is clear that a security interest does not arise in relation to tenant security deposits held on trust by landlords, parties may choose to avoid lease security deposits held by landlords, and instead use other common forms of tenant security to which the PPSA does not apply, such as bank guarantees and insurance bonds, or lease security deposits paid to third-party stakeholders (provided that lease documentation is drafted appropriately).
Assignments and subleases
Any security interest arising under a lease in favour of a landlord (such as in relation to landlord fitout or, potentially, a tenant security deposit) that is registered will need to be re-registered following an assignment or sublease. Landlords may, accordingly, wish to avoid allowing a tenant to assign or sublease without consent (even for assignments or subleases between related entities) unless prior written notice is provided by the tenant to the landlord, enabling re-registration to occur within the prescribed timeframes.
Landlords may, in some cases, have greater certainty in disposing of chattels abandoned by a tenant, by conducting a search of the PPS Register to identify the holders of any security interests in relation to those chattels, so that those interests can be accommodated before the assets are disposed of.
Purchaser deposits and call option fees
As with security deposits held for leases, a security interest could arguably arise in favour of both a vendor and purchaser where the vendor holds the deposit (on trust) under a contract of sale. The PPSA excludes security interests relating to deposits 'in connection with land', but whether the words 'in connection with land' capture a contract of sale of land and personal property is not clear.
Where the PPSA does apply, it will again be the case (as with lease security deposits) that priority of any security interest arising in relation to a purchaser deposit held on trust by a vendor cannot be obtained against prior registered security interests, despite registration within the prescribed timeframes.
Common practice under contracts of sale is for deposits to be paid to third-party stakeholders, and no security interest arises in respect of the deposit in these circumstances where contracts are drafted appropriately. So the PPSA will not apply in relation to most deposits paid under contracts of sale.
Call options are normally paid to the grantor of the option (the ultimate vendor). In most cases there is no security interest that arises in relation to the call option fee. However, if it is agreed that the option fee will be applied towards a deposit if the option is exercised, and the vendor holds the option fee in a separate account, then the same considerations as apply to a deposit held by the vendor may also apply to the option fee.
Transfer of security interests to purchaser under contract
A contract of sale will need to provide for any security interests in favour of the vendor that relate to the property being sold (such as in relation to landlord fitout or, potentially, tenant security deposits) to be transferred to the purchaser at settlement.
Purchaser due diligence
A purchaser's due diligence will need to identify security interests:
- that should be registered in favour of the vendor but have not been. A purchaser will need to assess the risk of any such security interest not being registered, and consider ways of managing that risk;
- which need to be transferred to a purchaser at settlement as mentioned above; and
- that are registered against the vendor and relate to the property being sold, which will need to be discharged by the time of settlement.
The pre-PPSA process of a vendor providing an ASIC Form 312 at settlement will no longer be possible, and is likely to be replaced by the provision of a copy of a discharge of relevant security interests, and an undertaking by the secured party to lodge a discharge on the PPS Register, should that be necessary to reflect the discharge (which might not always be the case, depending on the terms of the original registration).
Landlords should be reviewing their pre-PPSA leases (pre 30 January 2012) to identify any security interests that arise in relation to them (namely, in relation to landlord fitout and, potentially, tenant security deposits). If landlords wish to ensure that the continuing priority position afforded to these 'transitional' security interests during the two-year transitional period continues to apply after the expiry of this period on 29 January 2014, registration of each security interest is required before this expiry date. Failure to do so will leave these transitional security interests at risk in the same way as a new security interest not registered in time.
Standard form contracts of sale, fitout and incentive agreements, agreements for lease, leases and associated documentation will need to be reviewed and amended to accommodate the issues outlined above, and the new concepts and terminology the PPSA introduces. Some industry-wide standard documents are already being updated.
The impact of the PPSA on the principal activities of real estate industry participants is not as extensive as it is on some other businesses (such as financiers, or providers of equipment), but its impact is material and often counterintuitive. The PPSA will also have an impact on some of the incidental activities of all businesses, but these are not covered in this article.
The keys to managing the PPSA are education and compliance – early identification of areas of application; evaluation of risks and impact on business operations; and incorporation of PPSA registration, and other compliance measures, into business processes where necessary.
- John GallimorePartner,
Ph: +61 7 3334 3135
- John BeckinsalePartner,
Ph: +61 7 3334 3520
- Tony DaviesPartner,
Ph: +61 7 3334 3250
- David McLeishPartner,
Ph: +61 3 9613 8954
- Michael GravesPartner,
Ph: +61 3 9613 8814
- Mark StubbingsPartner, Sector Leader - Real Estate,
Ph: +61 2 9230 4257
- Victoria HolthousePartner,
Ph: +61 2 9230 4303
- Nicholas CowiePartner,
Ph: +61 2 9230 4025
- Tim LesterPartner,
Ph: +61 8 9488 3841