No doubt you will have heard about several recent tenant insolvencies – Roger David, Max Brenner, Maggie T, Oroton, Marcs, David Lawrence, Pumpkin Patch, Sumo Salad, Toys ‘R’ Us and Doughnut Time to name but a few. The reality for landlords when a tenant enters bankruptcy, administration, receivership or liquidation is that they are typically unsecured creditors and so will usually only receive a small portion of what they are owed in the final wash up.

However, all is not lost. The Personal Property Securities Act (PPSA) may be used to give a landlord the status of a secured creditor in some cases. Interested? Read on!

In order to become a secured creditor, a landlord must have a security interest in personal property and it must have ‘perfected’ that security interest. The surest way for a landlord to perfect a security interest is to register it on the Personal Property Securities Register (PPSR). At the end of the day, landlords are typically keen to re-let premises as soon as possible after a tenant has abandoned the premises. PPSR registration will give the landlord the ability to do so faster and may enable the landlord to sell or lease a defaulting tenant’s valuable property to a new tenant without the use of court procedures and even if the defaulting tenant is bankrupt or in liquidation.

Personal property is defined in very broad terms in the PPSA. In a leasing context examples include:

  • plant or equipment (other than fixtures) in the leased premises; and
  • a cash bond given to secure performance of the tenant’s obligations under the lease.

The PPSA operates on the basis that a person in possession of personal property (regardless of whether they own it) has, subject to any security interests which are registered on the PPSR, the legal right to sell or grant a security interests in the property to another person. These rights will pass to trustee in bankruptcy, receiver, administrator or liquidator of an insolvent tenant so that the proceeds of sale can then be used to pay the tenant’s creditors.

Common situations where PPSR registration can assist a landlord include where:

  1. a landlord leases premises to a tenant which contain plant or equipment owned by the landlord;
  2. a landlord gives a fitout incentive to a tenant to buy plant and equipment and the landlord retains ownership of what is bought;
  3. a landlord accepts a cash bond to secure performance of the tenant’s obligations under the lease; and
  4. a tenant abandons premises leaving behind plant and equipment which would be useful to a replacement tenant.
  1. Premises which contain the landlord’s plant and equipment

When leased premises contain plant and equipment which is owned by the landlord then:

  • the lease should contain a clause which gives the landlord a right to register its interest as owner of the plant and equipment on the PPSR; and
  • the landlord should register its interest before the tenant obtains possession of the premises and within 20 business days of the date of the lease.

If these requirements are met then the landlord’s ownership interest in the plant and equipment (called a PPS lease) will be preserved if the tenant becomes insolvent. Conversely, if they are not met then the landlord will lose priority for its ownership interest in the plant and equipment so that a trustee in bankruptcy (if the tenant is an individual) or a receiver, administrator or liquidator (if the tenant is a company) may sell the plant and equipment and use the proceeds to pay the tenant’s secured creditors.

  1. Fitout incentive used to buy plant and equipment where landlord retains ownership

When a landlord gives a tenant money to buy plant and equipment and it has been agreed that the landlord will retain ownership of what is bought then the landlord acquires a special type of security interest known as a purchase money security interest (PMSI). In such a situation:

  • the clause which deals with payment of the incentive should include a right for the landlord to register the PMSI on the PPSR; and
  • the landlord should register the PMSI before the tenant obtains possession of the plant and equipment and within 20 business days of the date of the lease.

If both requirements are met then the landlord’s security interest will trump any proposed dealing with the plant and equipment by a 3rd party buyer, trustee in bankruptcy, receiver, administrator or liquidator.

  1. Cash Bond

When a tenant gives a landlord a cash bond to secure performance of its obligations under the lease the landlord acquires a security interest in the cash bond. To best protect that security interest the landlord must register on the PPSR and take other procedural steps. If the landlord fails to properly register and the tenant becomes insolvent then the cash bond may be regarded as being the property of the tenant and be subject to seizure by a trustee in bankruptcy, receiver, administrator or liquidator and the landlord will become an unsecured creditor.

  1. Seized and abandoned goods at end of lease

Leases often include clauses which provide that title to the tenant’s abandoned property (or proceeds from the sale of that abandoned property) passes to the landlord, or that the landlord may seize and sell the tenant’s goods upon early termination of the lease. Such clauses give the landlord a right to register a security interest on the PPSR. Registration in such a situation can be very useful if a landlord wishes to seize and sell or lease the goods to a new tenant so as to minimise any loss of rent.

Ideally, a landlord should consider registration on the PPSR when the lease is:

  • granted;
  • transferred to a buyer of the tenant’s business; or
  • extended, whether by an option or otherwise.

If the landlord has not already registered its security interest on the PPSR, it may not be too late to register when the tenant defaults. Landlords should normally register in such cases, as the failure to register when the lease was granted may be retrospectively rectified in many cases. However, it is much safer, less expensive and far better to register promptly as set out above. Registration also gives the landlord the right to obtain certain information from other secured creditors about what property is secured and how much is owed. It may be that some valuable property is not covered by the earlier PPSR registrations of other creditors thus freeing up the landlord to deal with that property.

Moving Forward

Landlords should consider undertaking a “PPSA audit” to understand, verify and protect their rights. Thynne + Macartney can undertake this audit for you, provide you with more detailed information on how you can make the PPSA work for you, draft appropriate clauses for your leases or incentive deeds and attend to PPSR registrations.

If you need any assistance please don’t hesitate to contact Cameron Graham or Aaron Webb.

This information is intended to provide a general summary only and should not be relied on as a substitute for legal advice.

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