Issue:

The Personal Property Securities Act 2009 (Cth) ("PPSA") does not apply to land. However, it does not clearly deal with who has the best ownership of chattels located on the land.

Example:

The "grey areas" are demonstrated in the following scenarios:

Scenario 1:

Mr and Mrs Jones enter into a contract of sale to purchase a house together with certain chattels. ABC Bank Pty Ltd has a security interest over the current owner's personal property that is registered on the Personal Property Securities Register.

Who has the best claim to the chattels sold with the house? Mrs and Mrs Jones or ABC Bank?

Scenario 2:

Dr Jones leases a commercial premises for his medical practice. Dr Jones has decided to purchase an MRI to use in his practice. Dr Jones approaches ABC Bank Pty Ltd who agrees to lend Dr Jones the funds he requires to purchase the MRI. 

The MRI is purchased using the funds advanced by ABC Bank and installed in Dr Jones' premises using heavy duty bolts that are driven into the concrete floor of the premises. ABC Bank registers its security interest as a PMSI on the Personal Property Securities Register but does not enter into any other agreements with the landlord of the premises.

Dr Jones hits hard times and becomes bankrupt. Who has the best claim to the MRI? ABC Bank or the landlord? 

Answer:

The answer is unclear as it depends on the nature of the particular chattel, the degree of annexation of the chattel to the land and the intention of the parties.

Practical implications:

The PPSA defines "land" as including "all estates and interests in land, whether freehold, leasehold or chattel, but does not include fixtures." This should be read that sometimes chattels become part of the land.

Property law in Australia has long held that a chattel can become part of the land if it is sufficiently affixed to it. The tests used to determine whether a chattel has become a fixture include:

  • the purpose of annexation;
  • the nature of annexation;
  • the degree of annexation; and
  • the intention of the parties.

Although the above common law tests are consistently applied in the Courts, the outcomes are often inconsistent. That is because the determination of whether a chattel has become a fixture often comes down to the facts of each case. For example, Courts have held that carpets, light fittings, electrical wiring and installed stoves and dishwashers are fixtures whereas other free standing items are chattels.

Recommendation

Mitigate the risk of arguments (and possible damages claims) arising in relation to chattels located on real property by considering the following steps:

Conveyancing:

Vendors and purchasers need to proceed with caution when the status of a chattel (whether fixtures or chattels) is in doubt.

Vendors need to be particularly careful about what they represent as forming part of the sale and make sure in advance that any secured creditor will release any security over chattels that may not be fixtures.

Purchasers should require a secured creditor to confirm that it either does not consider the chattels (that are clearly not fixtures) are subject to its security interest or will release its interests in those chattels at settlement.

Leasing:

Equipment financiers should foreshadow disputes arising when they finance large pieces of equipment that may need to be affixed to real property. In addition to registering a security interest over the equipment on the PPS Register, equipment financiers should also consider requiring the landlord (and any freehold mortgagee) to enter into an agreement consenting to the installation of the equipment in the premises, acknowledging the equipment financier's security interest over the equipment, waiving any right the landlord/freehold mortgagee may have to the equipment and/or allowing the equipment financier to remove the equipment on certain terms.

The agreement with the landlord/freehold mortgagee should be a condition precedent to any advance for the purchase of the equipment and should be entered into before the equipment financier gives the doctor possession of the equipment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.