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PPS Lease change 2017

The definition of a ‘PPS lease’ has changed and your business may be impacted.

Background

The Personal Property Securities Amendment (PPS Leases) Act 2017 commenced on 20 May 2017.  It extends the period that leases and bailments need to have before they will be PPS Leases under the PPS Act.

When did this change come into effect?

The change came into effect on 20 May 2017.

This means leases and bailments that were entered into after 20 May 2017 will be subject to the new PPS lease definition.

What are the changes?

The minimum duration of PPS leases has been extended from more than one year, to more than two years.

Leases of an indefinite term will not be deemed to be PPS leases unless and until they 'run' for a period of more than two years.

Important Note: This change does not affect agreements entered into prior to the 20 May 2017.

There are instances where a lease might still meet the general definition of a security interest (section 12 PPSA) even if it is not a PPS Lease, so you should seek professional advice if these changes could impact your business.

What does this mean for fixed term PPS Leases entered into after Commencement?

The changes mean that those who enter into leases (and bailments) for two years or less (including applicable options to renew) will no longer need to register as the agreement is no longer considered a PPS Lease. 

If your agreement is entered into after Commencement and is for more than 2 years it would be considered a PPS Lease and should be registered. However, if your agreement is for two years or less, but exceeds the agreed term, it will become a PPS Lease when it extends beyond two years and should be registered at that time.

What does this mean for indefinite term PPS Leases entered into after commencement?

Leases and bailments of an indefinite term will not be PPS leases until they have ‘run’ for a period of more than two years.

For example, if a machine is leased for an ‘indefinite term’ under a lease entered into after the changes and is returned to the lessor after 20 months, the machine was never the subject of a PPS Lease.  If it was returned after 30 months it would have been.             

In the example where the lessee possessed the machine for 20 months, assuming the general definition of security interest does not apply to the arrangement (it might if the lease was a short term financing lease for example), the PPS Act does not apply to the lease arrangement.

When do I register my indefinite term PPS Lease?

Leases (and bailments) of an indefinite term may be registered at a time when a lessor has reasonable grounds to believe that an indefinite term lease will exceed a two year period. This may be at a time prior to the lease being entered into or as the lease approaches the two year period.

PPSR registrations that provide PMSI (Purchase Money Security Interest) priority need to be made in accordance with strict timelines, they often need to be made before a lessee (or other grantor) obtains possession. For an indefinite term lease, the lessee will often have had possession for an extended period when it becomes clear that the lease will extend for more than two years. The Samwise case [1] clarified that a period of possession prior to a security interest arising does not count for PMSI priority registration timelines. 

A PMSI priority can be achieved for leases that continue beyond two years by registering as if the first two years of possession did not count under the PPS Act for PMSI priority. This would involve a lessor making a registration in the last months of the second year or the first days of the third year of a lease (depending on the nature of the agreement) to obtain PMSI priority.

The report on the Review of the PPS Act makes recommendations about the clarification of registration timeframes in connection with PMSI priority and on other issues. The Government is working towards addressing these issues in its response to the report.

[1] Samwise Holdings Pty Ltd v Allied Distribution Finance Pty Ltd [2018] SASCFC 95

My lease agreement was entered into before 20 May 2017.  What does this mean for me?

The changes only apply to leases and bailments entered into after the change came into effect.

For arrangements entered into prior the changes, 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 does this mean for existing PPS Lease arrangements?

The changes only apply to leases and bailments entered into after the changes commenced.

For leases and bailments entered into prior to the changes, the law remains unchanged and registrations should proceed for these leases and bailments as usual.

Do I need to amend my existing registrations for leases (or bailment) entered into before the changes?

No. The amendments only apply to leases or bailments of goods entered into after this change came into effect.

Should I seek Professional Advice?

The PPSR is an important risk management tool for business, so you should seek professional advice if these changes could impact your business.