Change is here for “PPS Leases” under the PPSA
On 19 May 2017, the Personal Property Securities Amendment (PPS Leases) Act 2017 (Cth) (Amendment Act) received Royal Assent and is now effective. The Amendment Act has changed the definition of a "PPS Lease" (PPS Lease) under the Personal Property Securities Act 2009 (Cth) (PPSA).
What is a PPS Lease?
Before the Amendment Act, a lease or bailment of personal property which had an indefinite term or a term of more than one year (including the term of any options to renew) was deemed to be a security interest even though the lease or bailment did not secure any payment or performance of obligation. Such a lease and bailment was therefore a PPS Lease and was regulated by the PPSA.
Issues with a PPS Lease
The classification of a lease or bailment of personal property as a PPS Lease has caused issues for those involved in the leasing and hiring industry.
Our recent articles have highlighted some of the issues involved with PPS Leases and the catastrophic consequences for lessors under the PPSA. Each of the "Alleasing Case" (see full article here) and the "Forge Case" (see full article here) involved PPS Leases. In both of these cases, the relevant lessor did not perfect their security interest and, as result, they lost their personal property (even though they owned it!).
What has the Amendment Act changed?
The Amendment Act amended the definition of PPS Lease by:
- extending the minimum term of a PPS Lease from more than one year to more than two years (including the term of any options to renew); and
- removing leases and bailments with an indefinite term from the definition of a PPS Lease, unless and until such leases or bailments run for a period of more than two years (including the term of any options to renew).
These amendments mean that:
- a PPS Lease is now defined as a lease or bailment of personal property which has a term of more than 2 years; and
- a lease or bailment with a term of less than two years will no longer be a PPS Lease and lessors in such arrangements will not be subject to the PPSA.
The changes introduced by the Amendment Act are effective as at 20 May 2017 and do not apply retrospectively.
How will this impact lessors and bailors?
The Amendment Act attempts to alleviate the risk and compliance burden on small hire and rental businesses which engage in short but indefinite term leases. However, in reality, a prudent lessor who does not want to risk losing their valuable assets should perfect their security interest by registration regardless of whether their lease is intended to run for less than two years or more than two years.
It is easy to imagine numerous situations in which leases or bailments are intended to only run for two years but end up running for more than two years because of unforeseen circumstances (or opportunities). This exposes lessors and bailors to the risk of non-compliance with the PPSA and potentially losing their valuable assets to other secured creditors or liquidators.
Important to Note:
- The Amendment Act does not change the position in respect of leases or bailments which in substance secure payment or performance of an obligation (regardless of the term of the lease or bailment) ie, a finance lease. Such arrangements require lessors and bailors to perfect their security interest regardless of the term of the lease or bailment.
- The Amendment Act only applies to new leases and bailments which are entered into after 20 May 2017.
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