New definition of PPS Lease under the PPSA is now law

Further to my post on 12 May 2017 (see: http://bit.ly/2qRldhJ), the new definition of 'PPS Lease' under the Personal Property Securities Act 2009 (PPSA) came into effect on 20 May 2017.

As a result, section 13 of the PPSA now extends the minimum duration of PPS leases from more than one year, to more than two years. 

The Act also now makes it clear that leases of an indefinite term will not be deemed to be PPS leases unless and until they run for a period of more than two years. 

W G Stark 
Hayden Starke Chambers

When will the PPSA be amended to extend the minimum duration of PPS leases to 2 years?

According to the PPSR web site (see: https://www.ppsr.gov.au/blog-speeches/pps-leases-bill-passed-australian-parliament) yesterday the Personal Property Securities Amendment (PPS Leases) Bill 2017 (Cth) was passed by the Australian Parliament.

This Bill amends section 13 of the Personal Property Securities Act 2009 to extend the minimum duration of PPS leases from more than one year, to more than two years. 

This Bill also amends the Act to provide that leases of an indefinite term will not be deemed to be PPS leases unless and until they run for a period of more than two years.

The second reading speech claims that the Bill will significantly reduce the regulatory impact which the Act is having on short term hire and rental businesses, the majority of which are small to medium enterprise. 

The hire and rental sector almost exclusively uses indefinite term leases which usually run for less than a week and rarely exceed a period of two years. 

Very few hire and rental industry related transactions would be caught by the amended provision due to the increased minimum duration. 

Section 13 of the Act as amended will continue to capture longer term high value hire and rental industry leases appropriately. 

In the next few days, it will go to the Governor-General of the Commonwealth of Australia to receive Royal Assent.

The Bill will commence operation the day after it receives Royal Assent; this will be notified via further announcements on the PPSR website and PPS Register. 

WG Stark 

Hayden Starke Chambers

Who will win in priority dispute between a mortgagee and a tenant (Part 5)?

Readers will recall my recent post about another priority dispute between a registered mortgagee and a tenant. If you wish to refresh your memory, see here: 
http://bit.ly/2nbmFNa 

In Galloway v National Australia Bank Ltd [2016] VSCA 330, Osborn and Santamaria JJA dealt with another urgent application to restrain the sale of mortgaged property by an alleged residential landlord, pursuant to a tenancy granted without mortgagee’s consent. 

The Court of Appeal dismissed the application for an injunction. 

Galloway granted to the National Australia Bank Ltd (‘the Bank’) a mortgage to secure a loan in April 2008 over 9 Henry Street, Fitzroy (‘Henry Street’). 

Galloway defaulted in respect of the loan, and the Bank obtained an order for possession in November 2013.

After the judgment the parties continued negotiations concerning Henry Street and another property.

In April 2015, Galloway purported to grant a residential tenancy to a person named Fagan in respect of Henry Street.

Then, in September 2015, the Bank took possession of Henry Street.

After a series of attempted re-entries by Galloway, he sought a restraining order against the Bank in the County Court preventing it from selling Henry Street. 

On 25 November 2016, his Honour Judge Cosgrave dismissed the application for a restraining order.

The Bank proposed to sell Henry Street at public auction on 10 December 2016.

On 9 December 2016 Galloway:

(a)   Made an application to the Court of Appeal for that sale to be stayed; and

(b)   Filed an application for leave to appeal against Judge Cosgrave’s orders.

Galloway was still substantially in debt to the Bank, and the Bank held a valid order for possession of Henry Street.

The application for a stay was based on an argument under the Residential Tenancies Act 1997.

S 216 provides that ‘despite any Act or law to the contrary, a tenancy agreement does not terminate and must not be terminated except in accordance with this Division or Part 7 or 8’. 

S 223 provides as follows: 

A tenancy agreement terminates if a mortgagee in respect of rented premises gives a notice to vacate under section 268 and—(a)   the tenant vacates the rented premises on or after the termination date specified in the notice; or
(b)   the tenancy agreement terminates in accordance with section 334.

Section 268(1) provides that:

If a mortgagee in respect of rental premises under a mortgage entered into before the tenancy agreement was entered into becomes entitled to possession of, or to exercise a power of sale in respect of, the premises under a mortgage, the mortgagee may give the tenant a notice a notice to vacate the premises.

Mr Fagan gave evidence that he had not been given a notice in accordance with the provisions of the Residential Tenancies Act 1997. 

It was submitted that, unless such a notice was given, the tenancy agreement remained on foot and the Bank was not entitled to sell the land with vacant possession.

The Bank submitted that there were three fundamental answers to the applicant’s case.

The first is that at the date of the purported tenancy agreement, the Court had ordered the applicant to provide possession of the premises to the Bank. As a matter of basic principle, it followed that, although Galloway remained in bare possession of Henry Street, he was not able to grant a right of exclusive possession to the tenant as he purported to do for a term of three years.

Secondly, Clause 5 of the mortgage provides that, without the Bank's consent, the mortgagor may not grant a lease concerning the land which purported to convey any interest inconsistent with the limitation of interest created by the mortgage itself. Galloway sought to rely on his own breach of that mortgage. 

Thirdly, s 87C of the Transfer of Land Act 1958 provides in substance that a lease is not valid or binding against the mortgagee unless the mortgagee has consented in writing to the creating of the lease. The mortgagee did not consent to the creation of the lease; it follows that the purported lease is not valid or binding against the Bank.

The solicitor for Galloway submitted that the provisions of the Residential Tenancies Act 1997 overlay the provisions of the Transfer of Land Act 1958.

The Court of Appeal rejected this submission. If the lease is not valid against the mortgagee, then there is no lease upon which the notice provisions can operate. It noted that similar reasoning applied to the arguments relating to the capacity of Galloway to grant a lease when the land was subject to an order for possession made by the County Court, and subject to a mortgage containing the limitations upon which the Bank relies. 

The Court of Appeal was not persuaded that the fundamental point of law on which Galloway relied was seriously arguable or had any real prospects of success. 

In addition, the point taken was one which went essentially not to the interest of Galloway, but to the interest of the tenant Fagan. Fagan was not before the court. He had not sought to restrain the sale, and he had not sought himself to institute any challenge to the taking of possession by the Bank in September 2015. He had not been in possession of Henry Street for an extended period of time and his whereabouts were uncertain. 

Finally, the Court of Appeal noted that on the face of it, such complaints as Fagan may have sounded in damages, and the balance of convenience favoured the sale proceeding the next day. 

If the sale did not proceed, substantial costs would be thrown away and the interest payable under the mortgage would continue to accrue. 

The Court accepted that Henry Street had some apparent special value to Galloway because of its heritage characteristics, but this was not sufficient to outweigh the matters referred to above.

Conclusion 

This is another example of the difficulties faced when trying to litigate against a Bank which holds a registered mortgage. 

To remain safely in possession, a tenant should obtain the written consent of the Bank to the lease. Most lenders are unlikely to agree to such an arrangement, leaving tenants at risk of losing their occupancy rights if the landlord defaults in repaying the loan. 

WG Stark 

Hayden Starke Chambers

Are there any proposed amendments to the Personal Property Securities Act 2009?

Following on from several recent court decisions that have seen lessors lose in claims against insolvency practitioners, the Federal Parliament has recently introduced legislation to amend the Personal Property Securities Act 2009. 

The Explanatory Memorandum says:

This Bill would amend section 13 of the Personal Property Securities Act 2009 to extend the minimum duration of PPS leases from more than one year, to more than two years. This Bill would also amend the Act to provide that leases of an indefinite term will not be deemed to be PPS leases unless and until they run for a period of more than two years.

This Bill would significantly reduce the regulatory impact which the Act is having on short term hire and rental businesses, the majority of which are small to medium enterprises. The hire and rental sector almost exclusively uses indefinite term leases which usually run for less than a week and rarely exceed a period of two years. Very few hire and rental industry related transactions would be caught by the amended provision due to the increased minimum duration. An amended section 13 of the Act would continue to appropriately capture longer term high value hire and rental industry leases. The amendments would not modify the operation of the Act in relation to leases which are in-substance security interests.

According to the PPSR web site: 

If the Bill becomes law, leases (and bailments) entered into after the changes take effect would not be deemed to be security interests under the PPS Act if they are for periods of two years or less, instead of one year or less (including options for renewal etc.).
The Bill also provides that leases of an indefinite term would not be deemed to be PPS Leases until they run for a period of more than two years. This would mean that, should the Bill become law, leases (and bailments) of an indefinite term can be registered towards the end of the two year period instead of having to be registered at the start. Additionally, if a business does not suspect that a lease for an indefinite term—entered into after the proposed changes commence—will last for two years then no registration should be made.
For lessors currently making registrations over PPS Leases—because they lease on terms that meet the current definition but not the one provided in the Bill—if the Bill become law, a registration should not be made as the agreement would no longer be considered a PPS Lease.

What is clear is that businesses which lease goods need to consider the impact of the proposed legislative changes upon the way that they conduct their business.

WG Stark 

Hayden Starke Chambers

Who will win in priority dispute between a mortgagee and a tenant (Part 4)?

Readers will be familiar with a series of 3 posts I wrote about priority disputes between a registered mortgagee and a tenant.

To refresh your memory, the posts can be read here: http://bit.ly/2ntwt5T, http://bit.ly/2n4DMQP, and http://bit.ly/2n4DHwv

Despite the lack of success in these cases by tenants, that has not stopped tenants from trying to restrain a mortgagee from exercising its rights to possession of the mortgaged property after the borrower/landlord’s default.

In Annesley v Westpac Banking Corporation [2016] VSC 323, Derham As J, dealt with such a case.

In that case, Westpac, as mortgagee in possession, sought to dismiss the tenant’s claim summarily pursuant to ss 62 and 63 of the Civil Procedure Act 2010.  Alternatively, it sought judgment, a permanent stay or that the claim be struck out pursuant to the Supreme Court (General Civil Procedure) Rules 2015.

The registered proprietor and the previous registered proprietor of the property at 349 Nepean Highway, Brighton East, Victoria (‘the Property’) had borrowed moneys from Westpac secured by a mortgage over the Property.

The borrowers defaulted under the mortgage and on 2 April 2014 the Victorian Supreme Court ordered that Westpac recover possession of the Property. Appeals from that order were unsuccessful.

The Sheriff executed a warrant for possession on 10 February 2016 and obtained possession of the Property for Westpac. The Sheriff’s reports reveal the Property was then, and for a considerable period before that date had been, uninhabited and uninhabitable.

The next day, the plaintiff, (‘Mr Annesley’), commenced a VCAT proceeding, seeking an order under s 472 of the Residential Tenancies Act 1997 ('RTA') restraining Westpac from evicting him from the Property without obtaining a possession order from VCAT. Attached to the application was what purported to be a residential tenancy agreement for the Property dated 8 August 2015 between Mr Annesley and the previous registered proprietor of the property. The residential tenancy agreement relied upon by Mr Annesley contained a code ‘RT1(11/15)’ which an officer of Consumer Affairs Victoria swore means the document was last updated in November 2015. In other words, the pro forma residential tenancy agreement used was not available until November 2015. 

On 11 February 2016, VCAT’s Residential Tenancies List heard Mr Annesley’s application in the absence of the landlord and Westpac.

The Tribunal made interim orders on the basis that it found that the landlord and tenant were parties to a tenancy agreement subject to the RTA. The landlord and the Westpac Banking Corporation were required to take certain action in performance of duties under the tenancy agreement or the RTA.

At a further hearing on 29 March 2016, the Tribunal dismissed Mr Annesley’s application and set aside the orders made on 11 February 2016.

    

On 11 May 2016, Robson J granted Westpac a further warrant of possession in respect of the Property as a result of the previous registered proprietor of the Property re-entering the Property without permission. In addition, Robson J granted injunctions restraining Mr Annesley, the registered proprietor of the Property and the previous registered proprietor of the Property from seeking to re-enter the Property once Westpac was restored to possession of it. 

Federal Court Proceedings

As an aside, on 25 March 2015, registered proprietor and the previous registered proprietor of the property had commenced proceedings against Westpac in the Federal Court of Australia. The proceeding concerned the same matters that had arisen in the Supreme Court proceeding in which Westpac had obtained an order for possession of the Property in 2014. The registered proprietor and the previous registered proprietor of the property sought, amongst other things, orders restraining Westpac from enforcing its mortgage over the Property and seeking payment of damages. On 24 April 2015, Westpac made application for summary dismissal of the proceeding and on 27 October 2015, Beach J summarily dismissed the proceeding. The reasons for judgment published by Beach J on 27 October 2015 reveal a long and arduous process between the time of the making of the application by Westpac and the time of judgment. That long and arduous process was a product of a variety of applications made by registered proprietor and the previous registered proprietor of the property, and a series of adjournments and extensions of time as well as applications for leave to appeal from orders made by his Honour of an interlocutory kind. The account given by Beach J of these events shows a determination by registered proprietor and the previous registered proprietor of the property to delay and obfuscate.

The Course of the current Proceeding

The writ was issued on 1 April 2016 but not served. Nevertheless, Westpac entered an appearance to the writ on 5 April 2016.

Westpac filed its summons seeking summary judgment on 12 April 2016. The summons was returnable on 2 May 2016. On 28 April 2016, Westpac’s solicitors emailed the Associate Justice’s chambers, and copied the email to Mr Annesley, the registered proprietor and the previous registered proprietor of the property, attaching electronic copies of the affidavits and their exhibits for the convenience of the Court.

The registered proprietor and the previous registered proprietor of the property did not participate in the hearing or appear in court on that date.

An email response was received from Mr Annesley on 29 April 2016. He said in his email, among other things:

… I have not served notice of this action on any of the defendants as detailed in my writ and statement of claim.

…

I do not wish to be dragged into these proceedings at the present time.

The Associate Justice’s chambers responded to all the parties confirming that the proceeding had been listed before him on 2 May 2016 at 2.15 pm.

On the particular facts of the case, the Associate Justice found that Mr Annesley had no real prospect of establishing that he was a tenant at the Property pursuant to the alleged residential tenancy agreement.

His Honour went on to find that the indicia also provided substantial grounds to infer, as a matter of fact, that the tenancy agreement was not a genuine transaction entered into between Mr Annesley and the previous registered proprietor of the property. It appeared to be a device established to frustrate the rights of Westpac under its mortgage and its judgment for possession.

In this case, Westpac did not submit that its registered mortgage over the Property and its judgment against the registered proprietor for possession, each of which pre-date any purported tenancy agreement to which Mr Annesley is a party, has the result that Westpac’s proprietary interest as mortgagee is not subject to the interest of a tenant in possession under s 42(2)(e) of the TLA.

It did not so submit because of the operation of the terms of s 216 of the RTA, which provides:

Despite any Act or law to the contrary, a tenancy agreement does not terminate and must not be terminated except in accordance with this Division or Part 7 or 8.

His Honour concluded that this provision, and all the provisions to which it points, are premised on the assumption that there is a valid and enforceable tenancy agreement.  

At paragraphs 88 to 89, Derham As J held:

As a general proposition, it is an essential element of a present demise or grant of a lease (a letting) by contract that the tenant is given exclusive possession, and quite enjoyment, of the premises in question. That is, if another person is lawfully in possession, or has the present right to possession, of the premises there can be no valid demise or grant of exclusive possession to another.

[89] In my view, if the tenancy agreement was entered into as alleged by Mr Annesley, there is no real prospect of him establishing that the tenancy agreement ever had any force or effect as a demise or grant of exclusive possession of the Property for the term of 12 months. That is because when the previous registered proprietor of the property purported to enter into the tenancy agreement he had no right to possession to grant to Mr Annesley. He held, at best, an equitable interest in the fee simple which was subject to Westpac’s legal mortgage and to its right to possession pursuant to the judgment of the Court.

Conclusion

After a very lengthy delay, due to the number of obstacles placed in the way of the mortgagee by the players, and apart from having some interest as a result of finding apparent misconduct by the former registered proprietor and the alleged tenant, the claim ultimately otherwise went the same way as those referred to in my previous posts: the mortgagee prevailed over the interest of the alleged tenant.

WG Stark

Hayden Starke Chambers

Can I rely on the transitional provisions of the Personal Property Securities Act 2009 to enforce an unregistered security interest?

The transitional provisions of the Personal Property Securities Act 2009 (Cth) (PPSA) and their application to retention of title clauses were considered by the Victorian Court of Appeal in Central Cleaning Supplies (Aust) Pty Ltd v Elkerton (in His Capacity as Joint and Several Liquidator of Swan Services Pty Ltd (in Liq)) [2015] VSCA 92. 

Background
Central Cleaning Supplies (Aust) Pty Ltd ("Central") supplied cleaning equipment to Swan Services Pty Ltd ("Swan") from around 2009. Each supply of equipment included a retention of title clause ("ROT") in the invoice. 

Swan went into liquidation owing Central a sum of money for unpaid invoices for the period from November 2012 to May 2013. 

Central sought to enforce the ROT clause and reclaim its equipment. 

As readers will know, the PPSA covers a wide range of security interests, including rights under a ROT clause. The legislation makes it clear that a security interest will only be enforceable against a liquidator if that security interest is perfected. That would normally require the security interest holder to register its interest on the Personal Property Securities Register ("PPSR"). 

Central did not register its security interest on the PPSR. Instead it sought to rely on the transitional provisions of the PPSA, which were designed to protect security interests which had been created, or provided for, before 30 January 2012. 

The issue in the appeal was whether Central’s security interest in the equipment supplied after 30 January 2012 was ‘provided for’ by an arrangement entered into between Central and Swan in September 2009 for the supply of equipment on 30 day credit. 

Central claim could only succeed if it could show that this credit arrangement was a ‘security agreement [which] provided for the granting of’ a security interest in equipment supplied in the future.

Justice Ferguson at first instance rejected Central’s claim, holding that the credit arrangement did not ‘provide for’ the granting of the security interests in the future. 

The Court of Appeal decided that the terms on which Central agreed to provide credit to Swan included provision for the ROT clause as a standard term of each future supply of equipment. 

Accordingly, they allowed the appeal. 

In analysing the transitional arrangements, the Court of Appeal noted at paragraph 20: 

Plainly enough, what this provision contemplates is:

• a security agreement in force before the commencement time (although continuing thereafter);

• a security interest arising after the commencement time; and

• the qualifying relationship between the agreement and the interest being that the agreement ‘provides for the granting of the security interest’.

Thus understood, a security agreement — in this case, a transitional security agreement — will ‘provide for’ a security interest if it ‘provides for the granting of’ the security interest at some time in the future.

The Court went on to note that on this analysis, the relevant definitions will be satisfied if the agreement or act said to constitute the transitional security agreement makes provision for the grant of future security interests in goods supplied. It is of critical importance, therefore, to determine when and how the agreement between Swan and Central was made, in order to determine whether or not it made such provision. 

In a relatively short judgment, Maxwell P and Tate and Beach JA unanimously concluded at paragraph 39: 

It is clear that, in its terms, each ROT clause had application only to the invoiced goods the subject of the particular supply. The result of the contractual analysis, however, is that:

• Swan’s application for credit included an undertaking to be bound, in respect of every supply of equipment, by Central’s standard terms of supply;

• the ROT clause was in existence, as a standard term of supply, at the date on which the credit agreement became binding on Swan, being the date on which Swan received the first invoice for equipment supplied; and

• under that agreement, Swan accepted that all future supplies of equipment would be governed by that standard term (which would be expressed in each case to relate to the particular equipment supplied).

In those circumstances, the Court of Appeal allowed the appeal and decided that an agreement came into force — at the time of the first supply of equipment — which did ‘provide for the grant of’ a security interest in relation to all future supplies of equipment. That agreement was a ‘transitional security agreement’, and each of the security interests granted in respect of equipment supplied subsequently was a ‘transitional security interest’. 

Central was therefore able to enforce the ROT clauses notwithstanding the absence of registration.

Conclusion 
Although this decision allowed Central to enforce its ROT, it still highlights the importance of registering security interests arising from retention of title clauses on the PPSR to perfect that security interest.

Without the transitional provisions of the PPSA, Central would not have been able to enforce its ROT clause.

It should also be noted that the transitional provisions under the PPSA have now expired, so it is now unlikely that there will be further successful claims under those provisions.

WG Stark 
Hayden Starke Chambers

Who will win in a PPSA dispute over an unperfected security interest? Part two

I recently posted about a case dealing with an unperfected security interest under the Personal Property Securities Act, 2009 ("the PPSA"). 

In Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd, in the matter of Australian Gaming and Entertainment Ltd (in liq) [2014] FCA 1034, the Federal Court of Australia delivered another decision confirming that a failure to perfect a security interest properly in the shadow of insolvency, will result in the vesting of the personal property in the insolvent estate. 

Regular readers will recall that the PPSA introduced concepts of 'attachment' and 'perfection'. 

The interest of a creditor in personal property 'attaches' to the property when the relevant financing transaction occurs. 

However, the security interest remains 'unperfected' until the person claiming the security interest takes further steps to perfect their interest. 

Background

Mr and Mrs Pozzebon are the joint trustees of the Pozzebon Family Superannuation Fund. They loaned $250,000 to Australian Gaming and Entertainment Ltd (AGE) on 24 December 2013. 

The money was paid over and a security agreement was executed that day. 

As a result, the security interest 'attached' to the relevant personal property on that day. 

However, the security interest was not registered on the Personal Property Securities Register ("PPSR") until 19 May 2014. 

Seven days later, on 26 May 2014 (five months after attachment of the security interest) AGE was placed into voluntary administration. It was placed into liquidation on 1 July 2014.

At the time of liquidation, AGE had $860,000 standing to its credit in a bank account. Nearly $350,000 (including accrued interest and costs) of this fund was the personal property over which the parties were fighting. 

Section 588FL of the Corporations Act 2001 (Cth) (Corporations Act) relevantly provides that if a company is placed into administration or liquidation (insolvency event) and a security interest may be perfected by registration (and by no other means), then if registration did not occur within twenty business days of attachment and an insolvency event occurs within six months thereof, the interest in the personal property vests in the company in administration or liquidation. 

Similarly to the case about which I posted yesterday, unless the lender in this case could demonstrate 'perfection' of its security interest by means other than registration, the personal property sought to be secured would vest in the liquidator because it was not 'perfected' in time.

The security interest holder was unable to show that it had possession or control of the relevant collateral. It was also unable to prove temporary perfection of its security interest. 

Collier J noted at paragraph 35 that: 

The substance of the applicant’s case is that because the relevant security interest was perfected by attachment and enforceability and effective registration, the circumstances have taken the method of perfection outside the parameters of s 588FL(2)(a)(ii). They support this contention by submitting that attachment and enforceability are not always necessary for perfection, and that an example of this is in respect of temporary perfection of which attachment and enforceability are not necessarily elements.

Therefore, it argued that its security interest prevailed over the interest of the liquidator. 

The Federal Court rejected the security interest holder's statutory construction, and decided that although the applicant's security interest attached, it was not perfected within twenty business days of that attachment. 

As it was created within six months prior to the administration of AGE, the security interest was unenforceable against the liquidator and the personal property vested in the insolvent estate.

Conclusion 

The decision confirms how important it is for holders of security interests to take all steps necessary to ensure that they perfect that security interest within the limited time frames provided for in the legislation. 

W G Stark 
Hayden Starke Chambers