PPS reform and the hire and rental industry

From 30 January 2012, the Personal Properties Securities Act 2009 (Cth) (the PPS Act) established a new system for the creation, priority and enforcement of security interests in personal property, which is generally all property other than land, fixtures and certain statutory interests. The PPS Act generally applies to security interests in goods provided that the goods are located in Australia, or the grantor of the security interest is an Australian entity. The centrepiece of the PPS Act is the creation of a national Personal Property Securities Register (PPSR) on which security interests in personal property may be registered.

Importantly, the PPS Act widens the concept of what constitutes a ‘security interest’. In addition to covering more familiar concepts such as mortgages, charges and pledges, a ‘security interest’ can include interests created by finance leases, hire purchase arrangements and long-term operating leases.

It is important to note that while arrangements may be variously described as leases, hire or rental agreements, the arrangements will be regarded as creating security interests if they meet its legal definition.

As a consequence of PPS reform, members of the hire and rental industry need to consider whether existing practices give rise to security interests in the property hired or leased and whether the security interests should be registered on the PPSR.

This fact sheet should be read in conjunction with the ‘PPS key concepts’ fact sheet to get a greater understanding of the issues.

How are leasing arrangements treated under the PPS Act?

The PPS Act regards finance leases and hire purchase agreements as creating security interests under the PPS Act, because they effectively use property to secure payment.  

The PPS Act also treats long-term lease arrangements, known as ‘PPS leases’, as creating security interests in the property leased when the arrangement is for:

  • an indefinite period; or
  • a term or terms of up to one year or more for most goods.

The reason for this is so that a third party, such as buyer or potential lender cannot wrongly assume that the person who has possession of the goods has a right to sell or offer the goods as security.

Although the PPS Act does not apply to a short term lease of goods, a PPS lease will arise where the lessee continues to retain possession of the property with the lessor’s consent after one year.

Why register on the PPSR?

The PPS Act does not generally consider the identity of the owner of the property subject to a security interest when determining priority between two or more security interests in the same property. For example, the lessor’s ownership of the property will not determine who may have priority - it will be the priority rules in the PPS Act.

Although registration is not compulsory, the PPS Act generally requires the registration of security interests in order for priority to be maximised. The general rule is that a registered security interest will have priority over an unregistered security interest regardless of when it was created and whether there was knowledge of the existence of the earlier interest.

Also, if a secured party, such as a lessor, fails to register their security interest, they could lose the property in the event of the bankruptcy or liquidation of the lessee. A secured party could also lose their interest in the property if the security interest is unregistered and the property is subsequently sold or leased. In the case of serial-numbered goods, a failure to register by serial number may also result in the loss of a security interest in the property.

It is important to note that the PPSR is a notice board of security interests and not a register of agreements. Accordingly, a single registration may cover a number of agreements where the hirer/lessee is the same person or business entity. 

As already noted, the PPS Act will not apply if serial‑numbered goods are hired out for a maximum period of less than 12 months, provided the goods are returned at the end of the arrangement. Accordingly, no registration is required. However, if the hire period is indefinite then the PPS Act will apply.

What goods are registered by serial number on the PPS Register?

Although many goods are marked by a manufacturer’s number or other serial number, the only goods that may or must be registered by serial number on the PPSR are motor vehicles, watercraft and aircraft.  Motor vehicles and watercraft when held as consumer property must be described by serial number; when held as commercial property, registration by serial number is not mandatory.

Aircraft, whether held as consumer or commercial property, must always be described by serial number. The Personal Property Securities Regulations 2010 sets out the serial numbers to be included in a registration on the PPSR.

It is important to note that, regardless of whether inclusion of a serial number is mandatory or optional, a failure to include the serial number in a registration may result in the property subsequently being leased or sold free of the security interest. A failure to include a serial number where it is mandatory will result in the registration being ineffective.

Items hired out to customers that are not able to be registered by serial number; for example, generators or compressors; will require the grantor’s (i.e. the customer’s) details to be included on the PPSR.

What should you do to be prepared for PPS reform?

Some suggestions include:

  • Identify transactions that create security interests requiring registrations on the PPSR.
  • Reviewing the hire terms on agreements and other documentation to ensure that they take into account the application of the PPS Act.
  • Amend your policies and procedures relevant to your business to take into account the new PPS reform.       

PPS transitional provisions

For more information on the PPS transitional provisions including transitional security interests and migrated registrations please see:

Professional advice recommended

PPS could affect you or your business in a number of different ways. You should seek professional advice in relation to your specific circumstances.