PPSA and Property Leases - be safe not sorry

Although dealings with land are not registered on the Personal Property Securities Register (PPSR), the implications of the Personal Property Securities Act (Cth) 2009 (PPSA) for landlords and tenants and their personal property need to be carefully considered when entering into new leases.

Implications for Landlords

Property leases often involve personal property such as:

• plant or equipment (other than fixtures) owned by a landlord and made available under the lease including items purchased using a fitout incentive provided by a landlord and the landlord:

  • retains ownership of the fitout; or

  • sells such fitout to the tenant at the end of the lease or in instalments

• cash security bonds provided by tenants and held by landlords or a third party to secure performance of the tenant’s obligations under the lease

• plant and equipment owned by the tenant but left in the premises when a tenant abandons the premises

• personal assets eg where the guarantee clause in the lease provides that the guarantor /director providing the guarantee gives security over all their personal property as security for the performance of the tenant’s obligations under the lease

Where a party is in possession of another party’s personal property, the PPSA can operate to deprive the ‘real’ owner of their rights if the real ownership is not recorded on the PPSR.

Unless landlords register a security interest on the PPSR in relation to their personal property which is in the possession of a tenant, they may not be adequately protected against claims on the property by third parties including the tenant’s financier or by tenant insolvency appointees.

There have already been a number of examples of the PPSA’s ability to deprive owners of their property where PPSR registrations were overlooked or defective including one case involving the loss of approximately $60M of assets. 

We recommend that landlords:

• ensure new leases include a PPSA clause which permits the landlord to enforce security interests in personal property and removes compliance issues caused under the PPSA

• consider whether registration of a security interest is required in relation to any personal property:

  • once the lease has been signed by the parties; and

  • if the lease is assigned to a third party

• obtain advice to ensure registration of security interests meet the complex requirements of the PPSA

• arrange a search of the PPSR to determine if there are any registered security interests over property abandoned by a tenant at the premises before dealing with such property

Implications for Tenants

We have seen clauses included in leases prepared by landlords that are far-reaching and which could result in tenants being in default of the lease simply by virtue of pre-existing or intended financing arrangements.

These clauses operate to:

• create security over all the assets of the tenant

• prevent the tenant from creating:

  • an interest in respect of its own property in favour of any person other than the landlord without the landlord’s prior written consent;

  • security that ‘competes with’ the landlord (which disregards the PPSA position that the landlord, as an owner, can compete with the tenant’s financier)

• require the tenant to ensure that the landlord’s registered security interest over personal property has priority over any other security interests (which is a matter within the control of the landlord)

Tenants need to ensure that such PPSA clauses:

• contain reasonable terms

• restrict the landlord to making a registration on the PPSR which is confined only to the relevant personal property and does not cause inconvenience to the tenant by being overly broad

• will not affect the tenant’s ability to obtain finance and provide security to their financier.

Authors: Natasha Zusman and Stella Sun

Contributing author: Melissa Potter