Australia: The impact of the PPSA on real estate transactions

From the Ground Up (Built Environment Australia)
Last Updated: 11 July 2011
Article by David East and Peter Faludi

What is the PPSA?

The Personal Properties Securities Act 2009 (Cth) (PPSA) will commence in October 2011 (with the exact start date currently scheduled to be 10 October 2011).

The PPSA basically rewrites the law applicable to the taking of security over personal property (which is essentially all property other than real estate, fixtures, water rights and certain statutory licences).

Notwithstanding that the PPSA is limited to security over personal property, due to the broad meaning of 'security interest' contained in the PPSA, it will impact on a number of circumstances which are common in real estate transactions.

Essentially, if a transaction gives a person (the secured party) an interest in personal property that, in substance, secures payment or performance of an obligation, it will be subject to the operation of the PPSA (irrespective of the form of the transaction or the identity of the person who has title to the property). For more details relating to the operation of a PPSA, please refer to our PPS Updates.

How can the PPSA affect an owner of real estate?

Although compliance of the PPSA is not mandatory, failure to 'perfect' such a security interest by way of registration, possession or control can lead to significant adverse consequences. These include:

  • If another person holds a registered security interest in the assets over which the secured party has taken security (but has not registered), the other person will take priority over the secured party's interest and may be able to deal with such assets without reference to the secured party's security or their interest in the asset.
  • If the grantor of a security interest deals with the asset (over which the secured party has security) in the ordinary course of the grantor's business, those assets will be able to be disposed of and the secured party's interest in the asset will be extinguished (even if it holds title to the asset).
  • In circumstances of insolvency or administration of a grantor of security, the secured party may cease to be a secured creditor (or have security by way of ownership of the asset) and end up being only an unsecured creditor of the grantor.

In the context of real estate transactions, the following circumstances are likely to be regarded as security interests and fall within the ambit of the PPSA, thereby requiring consideration of its impact on the position of the land owner.

Abandoned goods clauses in leases

If a lease contains a clause that allows the landlord to retain and sell abandoned goods left by a tenant, to the extent that such clause provides the landlord with security for outstanding rent or other obligations of the tenant, the interest granted by such clause in favour of the landlord is likely to be treated as a security interest for the purposes of the PPSA.

As a result of the PPSA, if the landlord were to register its security interest over the abandoned goods before any other security holder registered its security interest over the same items, the landlord would be able to enforce against the abandoned goods and defeat the interest of the other secured creditors of the tenant. This is an improvement over the landlord's position under the current law.

However, to the extent that such security interest is not registered on the PPS Register or is registered after other security interests in the same items, in the absence of an appropriate priority deed between the landlord and the other financiers, a tenant's financier with security over all of the assets of the tenant will take priority to the landlord, resulting in the landlord not having the benefit of the abandoned goods clause.

Security interests over tenant's fittings

The PPSA does not apply to fixtures, which become part of the land to which they are affixed. Even 'tenant's fixtures' become part of the land - but the tenant has a contractual right to remove the tenant's fixtures at the end of the lease.

To the extent that the owner of real estate needs to take security over the tenant's fittings as security for the performance of the obligation of the tenant under a lease or otherwise, a security interest as provided for by the PPSA will arise. Once again, in the absence of registration of such security interest on the PPS Register, the tenant's other financiers (who may have security over the fittings) will take priority over the interest of the landlord, thereby potentially preventing the landlord from obtaining any benefit from such security interest.

If the landlord would have registered its security interest on the PPS Register ahead of the security interest held by the other financiers, the landlord would rank ahead and thereby have access to the fittings.

Importantly, from the landlord's prospective, if any of the tenant's fittings are in fact leased to the tenant, the failure by the lessor to perfect its security in such fittings by registering its lease on the PPS Register will allow the landlord (if it has perfected its security interest over the fittings) to take them free of the lessor's interest. This is a substantial potential benefit to the landlord, however this will only occur if the lessor of the tenant's fittings has not perfected its security interest as allowed for by the PPSA.

Real property mortgages that include an assignment of rents or insurance proceeds

It is common for a real property mortgage to also create a security interest in the rents earned by the owner of the property, as well as insurance proceeds received by the owner of the property. Such rents and insurance proceeds will be treated as personal property for the purposes of the PPSA and, in the absence of registration of the security interest created by the mortgage on the PPS Register, such security may prove to be ineffective against other secured parties who have a security interest over the rents and insurance proceeds (and have registered their security interest on the PPS Register), the liquidator or administrator of the owner and potentially third parties who acquire such rents or entitlements to insurance proceeds.

Equipment and other items leased or provided under bailment arrangements

For the purposes of the PPSA, certain bailment arrangements constitute a PPS lease (which is deemed to be a security interest for the purposes of the PPSA).

The effect of this is that the bailor of the equipment will need to register its bailment on the PPS Register in order to preserve its priority position in relation to the assets. For example, the supplier of scaffolding on a office building construction site may leave the scaffolding on the site for a period in excess of one year or indefinitely. In those circumstances, if the bailor does not register its bailment as a security interest on the PPS Register, the holder of a security interest granted by the owner of the property over all of its assets would have rights over the scaffolding (ranking ahead of the bailor), notwithstanding that the bailor holds legal title to the scaffolding.

Security deposits under building contracts

To the extent that a contractor seeks to have the benefit of a security deposit from the principal under the contract (to secure the payment obligations of the principal to the contractor), such arrangement is likely to constitute a security interest under the PPSA, thereby requiring registration on the PPS Register in order to avoid various negative consequences. To maximise the effectiveness of the security arrangement, the contractor would need to register the security interest on the PPS Register and may need to enter into appropriate priority arrangements with any secured creditors of the principal to ensure its priority over the deposit is maintained.

Importantly, if such deposit is with an Australian deposit taking institution (ADI), the ADI may have priority over the contractor, notwithstanding registration of the contractor's security interest on the PPS Register.

Other contractual arrangements

As you will see from the above examples, an arrangement may fall within the broad meaning of a security interest in personal property even though, from a commercial prospective, parties up to now have not treated such arrangements as security interests. As a result, it will be necessary to review the contents of a number of contracts that may (as a result of the broad meaning of a security interest for the purposes of the PPSA) no longer provide the benefits they previously did in the absence of registration of the relevant arrangement under the PPSA.

Bottom line

The reform of century-old law in relation to the taking of security over personal property brought about by the PPSA is significant. It is wrong to think that the PPSA is only relevant to financiers and that it has no impact on real estate transactions. From the above examples it is clear that PPSA can impact on a number of real estate transactions and needs to be carefully considered when determining the rights of parties under such arrangements.

DLA Piper has a team of experts that can assist clients in understanding how PPSA impacts on their business and the transactions in which are involved. Should you require any assistance in relation to PPSA, please contact one of our PPSA team.

© DLA Piper

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.


DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to www.dlapiper.com

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