A case study about a building company that does a PPSR search and enacts the ‘taking free’ rules for an excavator it hires.
What may be affected?
selling, bailing, leasing or hiring out construction plant and machinery, either separately or as part of works contracts
supply of goods on retention of title terms
fleet management services, and/or fleet rental services.
selling or buying materials on hire purchase.
What is not affected?
land, fixtures on land or interests in land (including rentals or other payments coming from the land)
State/Federal government interests, approvals and licences.
How does it benefit my business?
If you provide plant, equipment, machinery or motor vehicles to contractors in the construction industry, you probably do that through a hire purchase arrangement or lease.
Under hire purchase or lease, you hand over possession to the contractor but keep ownership (retention of title) and have the right to take the equipment back if the contractor stops paying.
Where a lease is for a fixed term of more than 12 months if it was agreed before 20 May 2017, and more than 2 years if it was agreed on or after 20 May 2017 (when the PPS Law was changed), or where you have retention of title terms, then PPSR registration can provide protection for your claim to retake possession if the contractor stops paying.
Leases and retention of title arrangements fall within the definition of purchase money security interests (PMSI) for registration and should be registered with that status.
PMSI status will give you priority over other registered interests in that property, such as that of the contractor’s bank, even if the bank registered a security interest over ‘all present and after acquired property’ before your registration.
Motor vehicles should be registered against their serial number, not just against the name of the grantor (the contractor leasing or purchasing the motor vehicle).
This will protect you in case the motor vehicle is sold on by the contractor.
The serial number will usually be the Vehicle Identification Number (VIN) which is usually located on a small metal place on the body of the vehicle.
Some portable construction equipment might not meet the definition of motor vehicle under the current law.
As a general guide, if the equipment has a uniquely identifying serial number and is built to be propelled on land by a built-in motor that is more than 200W power and it is capable of going over 10 kph, it will meet the definition – see Motor Vehicle.
When buying equipment, searching the register helps you make an informed decision.
You can check whether the valuable goods you want to buy, such as yellow goods, motor vehicles and machinery, are being used as security for a debt or other obligation.
While you might be protected even without a search, because the goods are sold in the ordinary course of business (or in the case of motor vehicles are bought from a licensed dealer who has already completed a PPSR search), a search gives you extra peace of mind that you are getting the property free of any prior security interests over it.
Important note: When searching you can search against the serial number of motor vehicles and/or the relevant grantor identifier, such as an ACN (Australian Company Number) for example.
A correct registration can keep you first in line even when your customer has sold the equipment you have a security interest in.
Your security interest can continue to the proceeds of the sale or sublease payments.
Where you supplied plant or equipment that was not supposed to be sold or subleased without your permission, you may have a claim to retake possession of any equipment, as well claim for payment from the proceeds of sale or sublease up to the value of your debt claim against the contractor.
Be aware that a claim to retake actual equipment can sometimes be defeated by the interest of the end-purchaser or sublessee.
This will – depend on other aspects of law, such as taking free rules – see purchaser protections.
If subleasing is permitted within the terms of the lease, a particular sublease might itself satisfy the definition of PPS Lease.
If a PPS Lease sublease occurs, a registration by the sublessee will be important to you.
A correct registration can keep you first in line even when your customer has sold the goods you have a security in.
Your security interest can continue to the proceeds of sale.
When goods are mixed together so they have lost their own identity (eg ingredients like cement and sand mixed to make concrete), a registration can help protect your interest.
With a registered security interest, you may still be able to claim a proportionate interest in the manufactured or processed end-product, or claim a like proportion of its value.
If you have a security interest in goods that are added to other goods, such as tyres installed on a truck, your security interest in the tyres continues.
Registration prior to installation helps protect your claim against later dealings with the truck, other than for certain buyers or lessees of the truck (see ‘Protection when buying goods’ above).
If you sell goods on retention of title terms, or lease goods out to contractors and others for periods of more than two years, or for a period which in fact has lasted more than two years, then registration can protect you if you claim a purchase money security interest (PMSI) on the register.
Priority rules determine which secured party ranks higher and who can be paid out first from the collateral.
The rules are generally, first in time, first in line (ie an earlier dated registration beats a later one over the same collateral).
An important exception is a PMSI.
If your registration falls into one of the following categories, you may have a PMSI and need to make sure you register correctly to maximise your risk protection.
Does your registration:
- involve a lease for a term of:
- more than two years
- up to two years but includes options to renew so the total term might exceed two years
- up to two years or an indefinite period and the lessee has uninterrupted possession for more than two years. (Note: this definition applies to leases entered into from 20 May 2017. For leases entered into before this date, the earlier PPS leases definition still applies) see leases, bailments and consignments.
- secure payment of credit that you gave when you sold the particular property (such as a credit account, retention of title, or loan finance for a particular asset to be purchased)
- secure the repayment of money you lent specifically to help the grantor acquire particular personal property and the loan was used to acquire that property (eg if you lent money specifically for the purchase of construction equipment, which were purchased with that money).
If so, you have a PMSI and must take the following steps to ensure your PMSI is enforceable:
- Register and tick the box on the PPSR financing statement to claim a PMSI.
- For goods you have supplied as part of your customer’s inventory, such as goods for your customer to sell or lease, register before those goods are delivered, or preferably as soon as you enter into terms with a new customer.
- For goods the customer is going to be using as equipment (not inventory), you have to register within 15 business days of delivery. Again, you can register as soon as you enter into dealings with a new customer, before any deliveries.
For more information see – purchase money security interests (PMSI).
Depending on the terms of the contract, there may be goods left on site which have interests that should be protected through registration.
protecting the contractor’s interest in temporary works (eg scaffolding) to be removed at the end of contract
the principal’s interest in goods paid for fully or partially by the principal but which are in the possession of the contractor
‘step in’ or ‘take out’ rights for the principal to use goods on site to finish the contract in case of contractor default.
Construction contracts commonly provide that monies owing by either party may be retained by the other party pending stage completion or events.
The retaining party should consider registration of their interest in the monies as an ‘account’.
PPSR provides increased financing opportunities for the construction industry.
For example, it enables business to borrow against a wider range of personal property (collateral) than was previously available. Personal property is anything other than land, buildings and fixtures.
Lenders, lessors and retention of title suppliers can protect their position more easily under the PPSR law and are more likely to lend against a wider range of collateral.
Financiers can view interests registered against the goods or assets of you or your business, and that makes it easier for them to decide whether or not to lend to you.
PPSR case studies
A case study about how a developer uses the PPSR when they engage a contractor to build a warehouse. Find out about priority rights and commingling of goods when using the PPSR and how it can help protect your business.
A case study about a manufacturer’s security interest in the wheels it makes and sells. Find out more about concepts such as retention of title, accession and registering on the PPSR before supplying goods to help protect your business.
A case study about a PPSR security interest being registered against an excavator during a financing deal.