Asset protection for the equipment lessor – Title is not king!

February 2, 2017

Are you a lessor of goods? Do you know someone (such as a client) who is?

A lessee leases goods that the lessor owns under a commercial arrangement. A lessor needs to take appropriate steps to protect those goods, being assets that belong to the lessor.

There are  two important things to remember. Under the Personal Property Securities (PPS) regime, goods include any assets that are not land or a fixture to land, such as all kinds of equipment. A “PPS lease” is a lease that is regarded as creating a security interest in those goods when the lease arrangement is for an indefinite period or a term or terms of one year or more. It is useful to note here that an agreement for shorter periods will still be a PPS lease where the lessee continues to retain substantially uninterrupted possession of those goods with the lessor's consent after one year.

A purchase money security interest (PMSI) will arise in a PPS lease transaction. If correctly registered, PMSIs enjoy “super-priority”. Super priority defeats all other security interests in the collateral. A lessor would want super priority!

Where a PPS lease exists, unless the requirements of the PPS Act have been complied with, a liquidator or receiver appointed to the lessee could take the lessor's assets to pay the debts of the lessee. This means even though the lessor is the legal owner of those assets, the lessor could lose the rights to the goods and be reduced to the status of an unsecured creditor. For this reason, it is often said about the operation of the PPS Act that title is no longer king.

Did you know to best protect those assets - this can be commercial ovens for a fast food chain, industrial espresso machines for a coffeehouse, or machinery for supply chain - the lessor's security interest (a PMSI) must be registered on the PPS Register within 15 business days of the lessee obtaining possession of the goods that are not for use as inventory? The timeframe is even tighter if the goods are inventory - the relevant PPS registrations must be in place before the goods are delivered to the lessee.

At SAI Global, we understand that it is incredibly challenging to observe the very tight timeframes, and the PPS Act's requirements can pose a real administrative burden on lessors who have a lot of valuable assets to protect by registration. All lessors know not to risk not doing things right and suffer the consequences. (Who can forget the example in Forge Group (in liq) v GE where GE failed to make a PPS registration to perfect its interest as lessor so GE lost its assets?).

SAI Global can help lessors get it right. We can help take the pressure away. We help leasing businesses to do bulk asset registrations at a fraction of the cost that it would cost your business to do this in-house.

We have helped many customers develop strategies to manage PPS registrations, including to make registrations in a timely manner. Discover how we can help you protect your assets by contacting us for a  free consultation today.