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Have you considered the implications of the PPSR on your leases?

An update from our Property and Development team.

Implications of the PPSR on leases

Although directed at personal property, the Personal Property Securities Act 2009 (Cth) ("PPS Act") has implications for the leasing of real estate.  The effect of the PPS Act is that an owner of personal property which is not in the owner's possession may not be able to enforce its rights in that personal property against a third party who does have possession, unless the procedures under the PPS Act are followed which includes the registration of an interest on the Personal Property Securities Register ("PPSR").

The following common leasing scenarios can be affected by the PPS Act:

  • Where a lease incorporates an incentive for a tenant to enter into the lease, such as a contribution to the tenant fit out, with the landlord to retain ownership of the fit out, the landlord is likely to have a security interest in that fit out.  The landlord should register its interest in the fit out on the PPSR prior to entering into the lease.  If the landlord fails to do so, a third party who subsequently takes possession of the tenant’s assets (such as a financier) may have a superior interest under the PPS Act to the landlord in the fit out.
  • A lease may contain a clause that allows a landlord to retain or sell abandoned goods left by a tenant after the tenant has vacated the premises.  The landlord should search the PPSR before dealing with the goods to ensure that a third party does not have a registered security interest in the goods. 
    The landlord should also consider, before entering into the lease, whether it should register its interest in those goods on the PPSR.  At the time that the lease is entered into the landlord may have a security interest in those goods in the event that they are abandoned by the tenant.  That interest will then only be enforceable once the lease ends and the goods are abandoned. 
  • A security deposit in the form of cash may create a security interest. If the landlord fails to register its interest on the PPSR, a third party is deemed to have a superior interest under the PPS Act by way of the third party registering its security interest on the PPSR. This would entitle the third party to the cash security deposit.

A security deposit in the form of a bank guarantee does not create a security interest.

Ultimately, it is a commercial decision for you to determine whether it is appropriate to register your security interests, but you should make that decision with knowledge of the operation of the PPS Act.

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