PPS Leases explained, what is Regularly Engaged in the Leasing of Goods and what is a PPSA Fixture?

The courts continue to hammer out the meaning of various basic provisions of the PPSA.

The decision in Forge Group Power Pty Limited (in liquidation)(receivers and managers appointed) v General Electric International Inc [2016] NSWSC 52 looked at two issues dealing with the reach of the PPSA to leases:

  •  What constitutes “regularly engaged in the business of leasing goods”
  • What is a fixture for these purposes?

Background

 The Personal Property and Securities Act 2009 (Cth) (PPSA) introduced a new national code for determining the priorities of security interests in personal property., where primacy is given to registered interests.

Prior to the introduction of the PPSA, a owner of personal property, as a lessor, had all the common law rights of an ownership against the world, including to recover that property.  Those rights were largely subject only to the terms of any transactions the owner entered with third parties affecting those rights: for example, by leasing, charging, pledging, bailing or selling the goods.

However, under the PPSA, the rights of ownership under a goods lease are affected when they are registrable security interests.  A security interest arises where, in substance, an interest in personal property provided for by a transaction secures payment or performance of an obligation: section 12(1) of the PPSA.

Ownership interests under a Lease – the PPS Lease

Difficulties arise in relation to leases under registration schemes, because it is necessary for legislators to distinguish between leases that are in substance a financing arrangement which secure a payment or obligation (finance leases), and leases that are pure leases exacting payment only for use of the property before it is returned (operating leases). Examples of the former might include a long-term car lease, over a period of 3 years, with no residual or an agreed balloon payment. An example of the latter might include a 7 day car-hire for a daily fee, with the vehicle returned at the end of the hire.

There is a grey area between the two concepts, and room to argue whether a security interest arises or not, depending upon the term and financial structure of a lease.

Under the PPSA, the interest of a lessor under a lease will be registrable in several circumstances:

  •  First, where in substance, the lease is a finance lease that creates an interest in the property that secures payment or performance of an obligation, and so falls within the general definition of a security interest. For example, a finance lease: see section 12(2)(i) of the PPSA;
  • Second, where the lease is a “PPS Lease”, irrespective of whether the lease is a finance or operating lease, but falls within the definition of PPS Lease: see section 13 of the PPSA.

The principal effects of failing to register are:

  •  Where the lessee is bankrupted or enters into insolvent administration, an unregistered registrable security interest vests in the liquidator or trustee; and
  • priority is lost to holders of security interests in the property who are registered, for example a financing bank.

Generally speaking, a PPS Lease is a lease of goods that endures for a period of more than 12 months or is in respect of goods registrable by serial number:

  • It does not matter whether the lease is a finance or operating lease. Both are caught;
  • It includes leases where, by renewal or extension, the lease may or does continue for more than 12 months;
  • It includes a lease of goods that may or must be described by serial number (eg cars, aircraft and aircraft engines, watercraft, boats, certain intellectual property: section 13(1)).
  • If the lessor is not “regularly engaged in the business of leasing goods”, the lease is not a PPS Lease.
  • Further, if the property is a fixture, rather than personalty, the PPSA does not apply – see PPSA section 8(1)(j).

So why is it necessary to have PPS leases in the legislation? Why not just rely on the substance of the lease to determine whether it falls within section 12? There appear to be several reasons:

  • First, to eliminate the grey area between operating and finance leases, but to preserve from registration short term leases that are likely to be operating leases;
  • Second, to bring property identifiable by serial number completely within the registration scheme;
  • Third, the interest of a lessor under a PPS Lease is purchase money security interest for the purposes of the priority rules, and so takes priority over other secured creditors who are registered – see section 14(1)(c). It is notable that the interest of a lessor under a short term finance lease of less than 12 months is not a PMSI.

The Limits of Regularly Leasing and Fixtures

In Forge, General Electric International Inc (GE) had by an operating lease dated 5 March 2013 provided four gas turbine electrical generators to the plaintiff (Forge). On 11 February 2014, Forge went into liquidation. Prior to 22 October 2013, GE had operated a business in Australia of renting gas turbine power generation units. From that date, it sold the rental business and had assigned the benefit of the lease and the turbines. It also continued to supply replacement turbines on a temporary basis and free of charge, to its customers who required maintenance on turbines that GE had supplied.

GE argued that at the time of the liquidation it was no longer regularly in the business of leasing turbines. The submission was rejected, since:

  • the relevant date to assess that issue was at the date of lease, not the date of liquidation (at[136]) and a the date of the lease it had not sold its business;
  • in any event, after the sale, GE continued to provide turbines on a replacement basis in the market, albeit where maintenance required it (at[134]).

GE also argued the turbines were fixtures. Under section 10 of the PPSA a “fixture” means goods, other than crops, that are affixed to land. GE argued that the definition was a “bespoke” definition that differed from the common law.   That submission was also rejected and the court found that the concept of fixture in the PPSA was the same as at common law (at [77]).

The turbines were found not to be fixtures on the facts. The key points included that (at [134]):

  • The turbines were truly portable, in that they were designed to be quickly demobilized and moved to another site, and were on wheeled trailer beds for that purpose;
  • They could be removed without damage to the land;
  • The cost of removal was modest compared to the cost of the turbines;
  • The turbines were rented for a short period, being two years, with limited renewals and were clearly intended to be removed in the future;
  • GE retained ownership and the lease specified that the turbines were personal property;
  • Forge was obliged to return them at the end of the term;
  • Forge did not own the site where they were installed.

 

 

 

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