PPS leases get another makeover

Key takeaways

The Personal Property Securities Act 2009 (Cth) (PPSA) applies to security interests in personal property including, but not limited to:

• leases that “in substance” secure the payment or performance of an obligation;¹ and
• the interest of a lessor of goods under a “PPS lease”, regardless of whether the interest secures the payment or performance of an obligation.²

The Explanatory Memorandum makes the point that the latest changes to the definition of PPS lease will apply to lease, rental and hire arrangements entered into after the commencement of the changes even if those arrangements incorporate the terms of a master or umbrella contract entered into before the commencement of the changes.

At least in the short term, insolvency practitioners will need to consider whether a lease is entered into before or after the commencement of the Amending Act, as this will determine which set of rules apply.

Key changes

The Personal Property Securities Amendment (PPS Leases) Act 2017 (Amending Act), which commenced on 20 May 2017, changes the definition of “PPS lease” in section 13(1) of the PPSA so that where the lessor is regularly engaged in the business of leasing goods:

• a lease of goods for a term of more than 2 years (rather than the previous one year) will be a PPS lease from day one;
• a lease for a term of up to 2 years (rather than the previous one year) that is automatically renewable, or renewable at the option of one of the parties, for one or more terms that might exceed 2 years is also a PPS lease from day one;
• a lease for an indefinite term will be a PPS lease if the lessee retains uninterrupted (or substantially uninterrupted) possession for more than 2 years (but not until the lessee’s possession extends for more than 2 years) – previously, leases for an indefinite term were PPS leases from day one;
• a lease for a term of up to 2 years (rather than the previous one year) will be a PPS lease if the lessor retains uninterrupted (or substantially uninterrupted) possession of the leased goods for a period of more than 2 years after the day the lessee first acquired possession (but not until the lessee’s possession extends for more than 2 years).³

The Amending Act does not affect the application of the PPSA to “in substance” security interests such as finance leases and hire purchase agreements.

Reasons for the changes

In his second reading speech for the Bill for the Amending Act the Minister for Justice explained the reasons for the changes:

“In consultation with Australian businesses and particularly the hire and rental industry, it became clear that although the PPS Act was an important initiative, it has created several challenges for small business in particular. These include the imposition of significant administrative burden and substantial compliance costs, which does need to be addressed.

…

Many Australian businesses which lease goods to customers for short periods of time permit their customers to use the goods for as long as they need them. It often does not make sense for a hire business to insist on fixed terms for the lease of a chain saw or cement mixer, for example. If the customer needs the goods for an extra day or a week, the lessor needs the flexibility to accommodate this without an onerous administrative burden.⁴

There is at least one reported case where a lessor who failed to properly register its security interest under a lease for an indefinite term lost its interest in the leased goods when the lessee became insolvent.⁵ Anecdotal evidence suggests this has not been an isolated occurrence and the concerns referred to in the Minister’s second reading speech are well founded. This is not to say that the changes introduced by the Amending Act are the best way of addressing these concerns.

Do the changes affect existing leases?

The Explanatory Memorandum for the Amending Act indicates that it is not intended that the amendments will apply to leases of goods which would have been PPS leases prior to the commencement of the Amending Act. At the same time, the Explanatory Memorandum makes the point that the latest changes to the definition of PPS lease will apply to lease, rental and hire arrangements entered into after the commencement of the changes even if those arrangements incorporate the terms of a master or umbrella contract entered into before the commencement of the changes.

At least in the short term, insolvency practitioners will need to consider whether a lease is entered into before or after the commencement of the Amending Act, as this will determine which set of rules apply.

What the changes mean for insolvency practitioners

Among other issues insolvency practitioners will need to look out for:

• unregistered lease, rental and hiring arrangements where the lessee has had uninterrupted (or substantially uninterrupted) possession for more than 2 years prior to the lessee’s insolvency;
• lease, rental and hiring arrangements that contemplate successive terms or option periods that might exceed 2 years. Such arrangements will still be PPS leases from day one and, if not perfected, will vest immediately prior to a relevant insolvency event;
• potential priority and vesting disputes if the lessor has not perfected within 15 business days of when the lessee first obtained possession of the leased goods (this is relevant to whether the lessor will have purchase money security interest super priority under section 62 of the PPSA) and within 20 business days of the relevant lease coming into force (this is relevant to the applicability of the vesting rule in section 588FL of the Corporations Act) and the PPSA applies to the relevant lease at or before the time of insolvency. The Amending Act does not clarify how these registration timing requirements are to be satisfied in the context of leases for an indefinite term which only become PPS leases (and therefore security interests) once the lessee has retained possession for more than 2 years. A similar issue exists for leases having a term of up to 2 years if the lessee actually retains possession beyond the 2 year period.⁶ It is likely that the lessee’s possession of the leased goods, for the purpose of section 62, will commence when the lessee has possession under a lease to which the PPSA applies. That is, when the lessee has had possession under the lease for more than 2 years. Likewise, it is arguable that a lease to which section 13(1)(d) of the PPSA applies will “come into force” for the purposes of section 588FL of the Corporations Act only when the lessee has had possession for more than 2 years, and the 20 business day period starts from that time.⁷ However, these outcomes are not clear;
• payments made to a lessor under a lease for a term of up to 2 years as these may have greater exposure to unfair preference claims.⁸

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¹ s. 12(1), PPSA.
² ss. 12(3)(c) and 13, PPSA.
³ The definition of “PPS lease” currently refers to both leases and bailment. For convenience, this article refers to leases only. Where the PPS lease definition refers to a lease this should be interpreted as including hire or rental agreements. 
⁴ Second Reading speech by Michael Keenan, Minister for Justice and Minister Assisting the Prime Minister for Counter-Terrorism, House of Representatives, 1 March 2017.
⁵ Carrafa, Goutzos & Lofthouse (as Liquidators of Relux Commercial Pty Ltd (in liq)) v Doka Formwork Pty Ltd [2014] VSC 570.
⁶ This issue also existed prior to the commencement of the Amending Act if the lease had a term of up to one year but the lessee actually retained possession beyond the one year period.
⁷ C Wappett, Essential Personal Property Securities Law in Australia, 3^rdEdition, LexisNexis, 2015 at [PPSA.13.A] and [PPSA.62.A].
⁸ This is based on the assumption that payments under a PPS lease are more likely to be treated as secured debts than payments under a lease that is not a security interest for the purposes of the PPSA.

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