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Leases and bailments

In May 2017, there was a change to the legislation regarding PPS leases. For further information about this, please see PPS Lease change 2017

Some lease and bailment arrangements are considered ‘security interests’ and can be registered on the Personal Property Security Register where: 

  • the transaction effectively uses personal property to secure a payment or performance of an obligation. Examples may include a finance lease, hire purchase agreement or pledge. This is called an ‘in substance’ security interest.
  • the lease or bailment of personal property falls into a category called a ‘PPS lease’ (see below), regardless of whether the property involved is being used to secure payment or other obligation.

Registration of these types of security interests provide notice of a lessor’s or bailor’s interest in the property. This is important because these types of arrangements can allow the lessee or bailee to maintain an outward appearance of ownership.

Generally, lessors or bailors are the persons who, as a result of the lease or bailment, gave possession of the property to the lessee or bailee. Lessees and bailees are the persons who receive possession, but not ownership, of the property. 

What is a PPS lease (for leases or bailments entered into on or after 20 May 2017)?

A ‘PPS lease’ is a lease or bailment where the agreement to lease or bail the property is for:

  • a set term(s) of more than two years (including options to renew)
  • an indefinite period but not until the lessee’s or bailee’s possession extends for more than two years

What is a PPS lease (for leases and bailments entered into before 20 May 2017)?

A ‘PPS lease’ is a lease or bailment where the agreement to lease or bail the property is for:

  • a set term(s) of more than one year (including options to renew);
  • an indefinite term
  • a term of up to one year or an indefinite term where, with the consent of the lessor or bailor, the lessee or bailee continues to retain substantially uninterrupted possession of the property.

What is not a PPS lease?

Note: There are instances where a lease might still meet the general definition of a security interest (s12 PPSA) even if it is not a PPS Lease, so you should seek professional advice if this could impact your business.

For leases or bailments of less than two years (from 20 May 2017).

A PPS lease will not arise where the lease or bailment is for a total length of less than two years.

Not regularly engaged in the business or leasing or bailing goods

A lease or bailment will not be a PPS lease if the lessor or bailor is not regularly engaged in the business of leasing or bailing goods.

If the bailee does not provide value

In the case of bailments, a PPS lease will not arise if the bailee does not provide value, for example by way of payment, in exchange for possession of the property.

Serial numbered goods

The rules for leases of serial numbered goods (such as motor vehicles, aircraft, and watercraft) changed on 1 October 2015. As a result, leases and bailments for serial numbered goods entered into:

  • on or after 20 May 2017 are PPS leases if they have a fixed term of two or more years
  • on or after 1 October 2015 but before 20 May 2017 are PPS leases if they have a fixed term between 90 days and one year
  • before 1 October 2015 are PPS leases if they have a fixed term of 90 days or more.

Pooling arrangements

A lease or bailment that is part of a ‘pooling arrangement’ will not be a PPS lease.

A pooling arrangement involves a lease/hire arrangement where fungible equipment is passed between multiple users with or without the owner’s consent before being returned to the owner. An example of such an arrangement is the lease and subsequent sub lease of pallets as part of the transportation of goods stored on the pallets.

Professional advice recommended

The information provided on this page in regard to the Personal Property Securities Act 2009 is general in nature and does not constitute legal advice. PPS law  may affect you and your business in a number of different ways. Seeking professional advice in relation to the specific issues affecting your business is recommended.

International examples

The PPS Act was drafted so that it was generally consistent with the comparable legislation overseas on which it was modelled. Accordingly, judicial decisions in those jurisdictions offer a guide as to how the PPS Act may be interpreted by Australian courts.

Examples of a bailment that was not a PPS lease under New Zealand law.

Rabobank New Zealand Limited v McAnulty [2011] NSCA 212

A horse was bailed by its owners to a commercial stud farm which was paid by the owners to provide services, such as managing the servicing of mares by the stallion, the collection of fees on their behalf, and generally providing for the horse’s care. A bank later registered a security interest over the stud farm’s property in exchange for finance. When the stud farm defaulted, the bank claimed an interest in the horse ahead of the owners because they had failed to register a security interest arising from the bailment of the horse.

However, the court found that the bailment, although exceeding one year, did not constitute the New Zealand equivalent of a PPS lease and the priority rules in the NZ PPS Act did not apply. Rather, it found that the owners of the horse were not in the business of bailing goods, but were rather in the business of maintaining and profiting from the stallion. To be in the business of bailing goods, an owner would have to receive, or intend to receive, payment, or some other form of value, with a view to making a profit from the bailment.

By contrast, in this case the bailee obtained possession of the horse, but did not pay for that possession; rather, the bailee was paid by the bailor to carry out services in relation to the horse. Therefore, it could not be said that the owner profited, or intended to profit, from the bailment. In deciding that this scenario was not caught by the NZ PPS Act, the court also commented that it considered the wording of the Australian PPS Act was clearer in excluding these arrangements from the definition of a PPS lease.