From our previous email alerts, you would be aware that the Personal Property Securities Act 2009 (Cth) (PPSA) commenced on 30 January 2012.
Whilst topics relating to the PPSA and retention of title arrangements have been discussed in our previous email alerts, we now take this opportunity to advise you of the greater scope of the PPSA and its application to lease and real estate transactions.
1. A security interest will arise in respect of a landlord’s fitout, to the extent that fitout is not a fixture excluded from the PPSA, in premises leased for one year or more or for an indefinite period.
2. Landlords will need to register these security interests within strict timeframes if they wish to avoid 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 arrangement.
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.
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.
Contracts for Sale
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 for sale.
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 for 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
When purchasing a property, a purchaser should undertake the necessary enquiries to identify security interests that should be registered in favour of the vendor but have not been. Prior to entering into any formal contract a purchaser will need to consider the following:
1. the risk of any security interest not being registered and how to manage such risk;
2. whether any security interests will need to be transferred on settlement for the benefit of the purchaser; and
3. that any security interests registered against the Vendor must be discharged on settlement insofar as they are related to the property being sold.
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).