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Leases and bailments

PPS Leases law change: The PPS Act has recently changed.

For leases entered into on or after 20 May 2017, the one year period applicable to PPS Leases has become two years.

The changes also affect the time at which a lease for an indefinite term becomes a PPS Lease.

Leases entered into prior to the changes are not affected.  For further details see  PPS Lease change 2017

The Personal Property Securities (PPS) Act is a law about security interests in personal property. Personal property is generally property other than real estate. A security interest is an interest in personal property that in substance secures payment of a debt or other obligation. This definition incorporates standard forms of security such as mortgages and charges. It also covers transactions not currently considered traditional security interests, notably certain lease and bailment arrangements.

Security interests may arise from such arrangements in two circumstances:

  • Where the transaction effectively uses personal property to secure payment or performance of an obligation (i.e. an ‘in substance’ security interest). Examples may include a finance lease, hire purchase agreement or pledge.
  • Leases or bailments of personal property that satisfy the definition of ‘PPS lease’, regardless of whether the property involved is being used to secure payment or other obligation.

Registration of a security interest arising from a PPS lease provides notice of the lessor’s or bailor’s interest in the property while it is in the possession of the lessee or bailee for a prolonged period. 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 PPS Lease?

A ‘PPS lease’ is a lease or bailment that is regarded as creating a security interest in the property leased or bailed when the arrangement is for:

  • an indefinite period; or
  • a term or terms of one year or more

However, an agreement for shorter periods will be a PPS lease where the lessee or bailee continues to retain substantially uninterrupted possession of the property with the lessor’s or bailor’s consent after one year.

What is not a PPS Lease?

A PPS lease will not arise where the lease or bailment is for a total length of less than one year. As from 1 October 2015 leases of serial numbered goods such as motor vehicles, aircraft, and watercraft are no longer PPS leases if they have a fixed term between 90 days and one year. Leases and bailments of serial numbered goods for a term or terms of 90 days or more entered into before that date are PPS Leases. Further, 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. 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.

A lease or bailment that is part of a ‘pooling arrangement’ will also 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

This Fact Sheet provides general information in regard to the Personal Property Securities Act 2009 and does not constitute legal advice. PPS reform 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 arrangements that were PPS Leases

Waller v New Zealand Bloodstock Ltd [2006] 3 NZLR 629

A racehorse had been leased by its owner for a term of more than one year. The interest of the lessor was deemed to be a security interest under the New Zealand PPS Act and was therefore registrable. However, the owner had not registered its security interest at the time the lessee went into receivership. The court relied on Graham v Portacom (below) to find that a financier, who had a registered security interest over all of the lessee’s present and future property including the horse, took priority over the unregistered security interest of the lessor. It is important to note that this case involved a lease to purchase arrangement (i.e. the intention was for the lessee to ultimately own the horse outright) where payment was provided in exchange for the racehorse.

Graham v Portacom New Zealand Ltd [2004] 2 NZLR 528

A lease of portable buildings for an indefinite term was found to amount to the equivalent of a PPS lease under the New Zealand legislation and the lessor was treated as having a security interest in the buildings. The court found that the lessee was able to grant a further security interest to a bank in the portable buildings despite not owning them. At the time the lessee went into receivership, the lessor had not registered its security interest, but the bank had. The lessor’s failure to register its security interest meant that the bank’s registered security interest over the same property took priority.

Examples of a bailment that was not a PPS Lease

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.