Currently, Australia has different laws and registers in each State and Territory for registering security over most types of personal property.  The Personal Property Securities (PPS) reform, which is likely to commence early in 2012, brings together the different Commonwealth, State and Territory laws and registers under one national system and introduces the online PPS Register.

Personal property is any form of property other than land or buildings and fixtures which form part of that land.  It can include tangibles such cars, boats, machinery, crops - as well as intangibles such as shares, intellectual property and contract rights.

Unexpectedly, the PPS regime has implications on real estate – even though the PPS regime is only intended to relate to personal property.

Abolition of the Nemo dat rule

As a result of the PPS regime, the nemo dat rule has been abolished for personal property.  In essence, the nemo dat rule provides that a person cannot give better title than what the person had.

Under the PPS regime, a person who has possession of goods (not necessarily title of the goods) can pass good title to a purchaser, unless the secured party has registered a security interest in the goods on the new PPS register or perfected their security interest.

How does it affect property transactions?

The PPS regime can impact real estate transactions.  Some of the impacts on real estate are outlined below.

1.       Lease of land that includes a lease of goods

A lease of land and any lease of fixtures on the land is excluded from the PPS regime, as personal property does not include property that is land.

However, many landlords enter into operating leases, which involve not only the lease of real property, but also goods leased with the real estate. Therefore, landlords may want to note a PPS interest in such goods.

For example, a landlord that leases a factory would not note the lease on the PPS register. However, if the landlord is also leasing equipment, which is used in the factory as part of the plant and equipment, which are not fixtures, the landlord may want to register a PPS interest in that equipment. If the landlord’s interest in that equipment is not registered, then the landlord runs the risk that another party (e.g. a liquidator of the tenant, or someone who registers a security interest in the goods) will have a superior interest in those items even though the landlord is the owner of those goods.

Therefore, landlords will need to ascertain if personal property is included in any real property leases and decide whether it is so material that it is appropriate to protect their interest by registering a security interest on the PPS register.

In addition, landlords should also consider those leases entered into prior to the PPS reform. There is a two year transition period from PPS commencement for finalising new registrations. Within that two year period pre PPS commencement interests are given temporary priority. Prudent landlords should take steps to have their pre-PPS leases reviewed to determine whether there is personal property leased, and if so, to register a security interest before the end of the transitional period (estimated to be June 2013).

Landlords may want to conduct that review early or late during the period. Gadens Lawyers can assist landlords with that review.

2.       Incentives under leases

Many landlords negotiate deals involving lease incentives. For example, the landlord may provide some incentive by way of a new fitout provided to the tenant. In many instances the arrangement is that the landlord provides and owns the fitout. If the landlord does not register its interest in the fitout on the PPS register, it runs the risk that a person with a registered security interest against the tenant will have a superior interest in the fitout.
It would be prudent for landlords involved in this leasing process to register their interest in furniture and fittings acquired from lease incentives such as this on the PPS register.

3.       Real estate purchases including personal property

1. Purchasers of business real estate should consider whether the purchase involves any personal property.

For example, a business purchasing a hotel may also be purchasing:

• stock-in-trade;

• consignment items; and

• bailment items.

There may be registered security interests in these items. Businesses should therefore carry out searches of the PPS register to determine whether there are any outstanding interests over these items.

1. Purchasers of commercial buildings should also consider possible personal property comprised in the sale. To be sure as an incoming purchaser that you are taking over all items of the sale, for example, the landlord’s fittings, you would need to check the PPS register as part of your due diligence to determine whether there are any registered security interests over such items.

2. Development site purchases may include a development consents, drawings, designs, etc. These are interests that should be checked against the register on acquisitions.

Require assistance?

The new PPS reforms present implications for the real estate market and market players should be aware of any potential PPS interests that may arise as a result of certain property transactions.  Those interests should be registered on the PPS register accordingly, so that those interests are protected from completing claims of other parties who have perfected their interests.  Gadens Lawyers can help you prepare for PPS and protect your potential PPS interests.

This report does not comprise legal advice and neither Gadens Lawyers nor the authors accept any responsibility for it.