The Impact of the Personal Property Securities Act on Commercial Leases
The Personal Property Securities Act (PPSA) does not just apply to personal property. It can apply to real estate transactions. For example, if a commercial lease does not deal with it, then the lessor could find themselves out of pocket very quickly.
At Leigh Adams Business Lawyers North Sydney, we give specialist legal advice on this important area and keep our clients out of trouble.
It is common in commercial real estate leases for there to be a provision that the tenant has sole use and possession not only of the premises which are leased, but also of equipment and fittings of the lessor.
In such circumstances, the granting of the real estate lease also grants to the tenant, a lease interest in the lessor’s equipment and fittings.
Under the PPSA, possession is now 9/10ths of the law. What this means in a practical sense is that the tenant’s lease interest in the lessor’s equipment and fittings is a higher or prioritised interest and trumps or usurps the lessor’s interest as owner of those items.
How is the lessor exposed?
Under the PPSA, a leasehold interest held by a tenant is a ‘deemed security interest’. The PPSA as confirmed by numerous cases, makes it clear that a security interest is proprietary in nature. So what? Well, under the PPSA, a security interest vests in the liquidator of a company or in the bankruptcy trustee of an individual upon the company’s liquidation or the individual’s bankruptcy, if the security interest has not been perfected.
This means that if the tenant goes bust, then title to the lessor’s equipment and fittings will pass to the tenant’s liquidator or bankruptcy trustee if the security interest granted by the lessor has not been perfected.
If title passes to the liquidator or bankruptcy trustee, then the lessor will become an unsecured creditor for the market value of the items, title to which has passed to the liquidator or bankruptcy trustee.
What can be done about it?
Simply put, the lessor has to “perfect” its security interest in the equipment and fittings which it owns but which it provides to the tenant under the commercial lease agreement.
This means that the commercial lease document has to provide that the tenant acknowledges that the commercial lease constitutes the grant of a security interest in the lessor’s items. The commercial lease should provide that the lessor is entitled to perfect that security interest as grantee by registration under the PPSA and the lease should also provide that the tenant must do all the things required of the tenant by the lessor to enable that registration to take place and to perfect the lessor’s security interest in the items.
It is particularly important to have a provision to the effect that the tenant must ensure that the lessor’s security interest in the items has priority over any other security interest that the tenant may have already provided to third parties, at least in relation to the lessor’s items. This may mean that a deed of subordination is required.
Leigh Adams Business Lawyers at North Sydney have prepared many deeds of subordination and are experts in protecting lessors’ security interests under the Personal Property Securities Act as they appear in commercial leases.
What other obligations should the tenant have?
The tenant should warrant that they have not themselves created a security interest in the lessor’s items. They should warrant that they will not do so.
The Personal Property Securities Act has a whole chapter (Chapter 4) on how recovery of property the subject of a security interest can take place. It provides for the granting of notices to the grantor (who in our situation is the tenant).
It is a good idea for the lessor to have provisions in the commercial lease by which many of the sections in the chapter do not apply. For example, in some circumstances, notices must be given before recovery can commence. Of course, in circumstances where the relationship between the lessor and the tenant is at a low ebb, the giving of notice by the lessor could mean that recovery becomes impossible – as the items have ‘mysteriously’ disappeared by the time recovery is attempted.
Accordingly, it is not uncommon for the commercial lease to provide that the tenant has no right to a verification statement, financing statement or financing change statement and definitely no right to the notifications set out in s 115 of Chapter 4.
The lease should also provide that prior to the tenant disposing of its leasehold interest (e.g. if the tenant wants to assign the lease) the tenant must ensure that the prospective assignee, subtenant or licensee will do whatever is necessary to allow the lessor to re-register their security interest following such assignment, subletting or assignment.
What about the tenant’s property?
Most commercial leases provide that the tenant must move their own property out of the premises at the end of the lease.
In many cases where a tenant has been chronically late in paying the rent, it is because the tenant’s business has failed. The lessor has re-taken possession, but the lessor finds that the tenant has left some or all of the tenant’s property in the premises.
Many leases provide that any property left in the premises by a tenant can be sold by the lessor and that the lessor can apply the proceeds of sale towards any rent which is outstanding.
But failure to include in the commercial lease a PPSA provision dealing with the tenant’s own property which has been abandoned at the end of a lease may mean that the lessor has to do battle with the provisions of the Uncollected Goods Act as well as the liquidator or bankruptcy trustee of the long-departed tenant.
Why use Leigh Adams Business Lawyers
Our Leigh Adams is an accredited specialist in business law. He is a Sydney based personal property securities lawyer. As a member of the Law Council Insolvency Committee and of the Law Society of NSW Business Law Committee, he understands the application of the Personal Property Securities Act to commercial leases. Our commercial leasing lawyers draft and renew commercial leases all the time and advise small business owners on business transactions. Call us today on 02 9964 0022 or email firstname.lastname@example.org. We get you there.