The PPS lease change is here! What does this mean for your practice?

May 11, 2017

The Personal Property Securities Act 2009 (Cth) (PPSA) and the Personal Property Securities Register (PPSR) are now 5 years old. The Australian Personal Property Security (PPS) regime is all about substance over form; the focus is substance of transactions, rather than the form.

This means some transactions that were not previously considered to be security arrangements could be caught by the PPSA. An example of this is title retention arrangements.

Perhaps one of the biggest changes in the law is the concept of “deemed security interests” (under s12(3) of the PPSA). A “PPS lease” (s13) is arguably the most controversial of the deemed security interests. In effect, certain commercial leases are deemed to be security interests and must be “perfected”. Registration on the PPSR is the most common manner in which perfection is completed. Failure to do so means the secured party may lose priority in the property and may lose their interest entirely if the grantor of the interest (usually the debtor) becomes insolvent per the vesting rule in the PPSA (s267). 

The definition of PPS lease is changing - again. There was a definition in 2012 when the PPSA commenced, then the definition was changed in October 2015, and now, the definition is changing again. In March, a bill was introduced to:

  • extend the minimum duration of PPS leases from more than one year to more than two years; an
  • provide that leases of an indefinite term will not be deemed to be PPS leases unless and until they run for more than two years.

On 11 May 2017, this bill passed both Houses and is presented to the Governor-General for assent. The amendments will commence the day after the Bill receives the Royal Assent, which just took place on 19th May 2017.

What does the change in duration mean? For those in the business of leasing, especially in short term hire, the amendment would reduce the PPSA's regulatory impact because much fewer transactions would be caught by the legislation due to the increased minimum duration of a PPS lease. 

And what does the change regarding indefinite term leases mean? For those who are charged with the important task of registration, this could now take place towards the end of the two-year period (as opposed to needing to attend to registration at the start). Further, unless a lease is likely to run for an indefinite term, registration is not necessary.

Whilst these are useful tips to bear in mind, there may be traps to be aware of. For example, it is important to remember that the PPSA defines security interest as “an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property)” (s12(1)). This means, following the amendments to the PPSA, it is possible that a lease that does not meet the definition of PPS lease could be captured by the definition of a security interest and therefore should be perfected. Also, remember that the interest of a lessor under a PPS lease is a purchase money security interest (PMSI). PMSIs must be registered in the manner prescribed, otherwise it would not enjoy “super priority”.

We will let you know when the Bill has been given the Royal Assent.

Read more about the PPSA and the PPSR in SAI Global's industry news: