Landlords and tenants would be forgiven for thinking they need not worry about the new Personal Property Securities Act 2009 (PPSA), which commenced on 30 January 2012.  After all, the new law refers to personal property, not land, so there should be no problem. However the PPSA has implications for real estate as well.

In general terms the PPSA creates a national registration system for security interests in tangible (and some intangible) items of personal property, which basically means property other than land. Someone with an interest in tangible property like goods or equipment (“chattels”) can register that interest on the PPS Register. The PPSA is specifically prevented from applying to an interest in a tangible item of property when that item is sufficiently annexed to land such as to be deemed a fixture.

However, there is a difference between how a fixture is defined under the general law and the definition of a fixture in the PPSA.  Basically, it has to do with the degree of “annexation”. The fact that over the years the courts have been somewhat variable in applying tests of annexation has created uncertainty and led to disputes between landlords and tenants.

The issue most clearly arises when fixtures and loose chattels are to be removed from the premises at the end of a tenancy.  If they are not removed the lease usually provides that they then belong to the landlord. A landlord is helped in this regard by the fact that where some chattels are so annexed to the premises as to become fixtures they are put beyond the reach of the PPSA. Thus the terms of the real property lease take priority over the financier’s PPSA security interest registered against the tenant.

On the other hand, the degree of annexation of these “tenant’s fixtures” may be challengeable, or it may be that the fixtures were intended to be removed at the end of the lease anyway. In such cases the items in question should not be regarded as fixtures. The tenant’s secured lender may have a claim on them in priority to the landlord, despite what the lease may say.

An example of this tricky situation is where an owner of commercial kitchen equipment supplies the equipment on Retention-of-Title (“ROT”) terms to a tenant’s premises. The equipment is to be used in the tenant’s restaurant business and accordingly must be fixed to the premises for proper use. In the light of the PPSA the supplier of the equipment would be expected register its ROT security interest on the PPS Register.

Because of the risk that the kitchen equipment could be deemed to be a fixture and thus fall outside the PPSA, the supplier might also seek a right-of-entry waiver with the landlord (and even the mortgagee).  In this way it is made clear that the landlord’s interests do not extend to the equipment even though it is annexed to the real estate.

If the tenant vacates its tenancy leaving goods and equipment behind the landlord might have a claim to the fixtures at least, under the lease, or even based on general law. On the other hand, a signed waiver together with the PPSA registration would probably decide the issue in favour of the equipment supplier.

When it comes to loose items the landlord may not necessarily have a claim either, despite the terms of the lease, as a search of the PPSA register will disclose that the supplier has its prior ranking ROT interest in those items.  Another secured party such as the tenant’s financier may even rank ahead of the landlord.

In conclusion, now that the PPSA is in operation, real property lease documents should make clear how a landlord can deal with items of personal property left behind when the lease is terminated or if the tenant vacates the tenancy.  The landlord should always search the PPSA register in order to determine whether any other party should be consulted prior to dealing with the items.  On the other hand if a claim is made asserting a PPSA interest, a landlord should not be bluffed into accepting the secured party’s position without first making investigations and considering the legal definition of fixtures as applied under the PPSA.

For more information contact partners@pigott.com.au.

This article is intended to provide general information in summary form on a legal topic, current at the time of publication.  The contents do not constitute legal advice and should not be relied on as such. Formal legal advice should be sought in specific circumstances.