Beware the multi-million dollar consequences of a failure to register a PPS Lease.
Registration of a PPS Lease on the Personal Properties Securities Register (PPSR) is crucial in order to protect a lessor’s interest in leased goods.
For those engaged in the business of leasing goods this is the paramount point to take from the decision of the New South Wales Supreme Court (Court) in Forge Group Power Pty Limited (in liquidation)(receivers and managers appointed) v General Electric International Inc [2016] NSWSC 52 (Forge decision).
A failure to register a PPS Lease may invoke the application of the vesting rules established by thePersonal Properties Securities Act (2009) (PPSA), leading to significant losses for lessors.
PPS Leases
A PPS Lease is created where goods (such as equipment and machinery) are leased for a period of one year or more, or for an indefinite term, and the lessee provides ‘value’ for the goods leased.
There are some exceptions to this rule. For example, a lease of goods will not be a PPS lease where the lessor is not regularly engaged in the business of leasing goods. As with all exceptions, caution should be exercised when determining whether such exceptions apply.
In order to preserve a lessor’s interest in the leased goods, a PPS Lease must be registered on the PPSR. The consequences which may arise if a PPS Lease is not registered are starkly demonstrated by the Forge decision.
Facts
- Horizon Power engaged Forge Group Power Pty Ltd (in liquidation) (receivers and managers appointed) (Forge), to design a power station and supply, test and commission all equipment installed.
- For the purposes of fulfilling the agreement with Horizon Power, Forge entered into an agreement with General Electric International Inc. (GE) for the rental of 4 mobile gas turbine generator sets (Turbines) for a fixed term.
- After the Turbines were installed, Forge went into liquidation.
The case and the issues
Critically, GE did not register the agreement it had with Forge as a PPS Lease on the PPSR.
Forge (via its liquidators) therefore asked the Court to declare that because the arrangement was a PPS Lease and GE had failed to register its interest in the lease, the Turbines vested in Forge in accordance with the PPSA vesting rules.
In defending the proceedings, GE argued that the arrangement it had with Forge was not a PPS Lease, and therefore the PPSA did not apply, because:
- GE, as the lessor, was not regularly engaged in the business of leasing goods and as such, a PPS Lease had not been created; and
- the Turbines had become fixtures. The PPSA does not apply to an interest in goods that are affixed to land.
The Decision
The Court determined that the agreement between Forge and GE was a PPS Lease. Because GE had failed to register its interest in the lease on the PPSR, the Turbines vested in Forge.
In particular, the Court decided:
- in determining whether or not a person is regularly engaged in the business of leasing goods, leasing activities outside of Australia may be taken into account;
- the frequency or repetitiveness of leasing activities is relevant, but not determinative. The critical question is whether the leasing activities form a proper component of the lessor’s business;
- orthodox tests should be applied in determining whether something has become ‘affixed to land’. Such tests include considering the purpose of fixing the item to the land, whether the item is to be in place permanently or temporarily, whether removal would damage the land or buildings to which the item is attached and whether removal would destroy the item; and
- in applying these tests, the Turbines had not become affixed to the land because it was the intention that the Turbines be removed from the land and returned to GE at the end of the lease.
The Point?
Importantly, the Forge decision is consistent with previous court decisions concerning the PPSA and registration of security interests. The result, while dramatic, is not surprising and serves as a timely reminder of the importance of registration.
Don’t be the next GE. When leasing goods for a period of one year or more, consider carefully whether the lease should be registered on the PPSR. A failure to register such an interest may result in multi-million dollar losses.
If you would like further information, please contact:
Justin Hill
Principal
M: 0418 578 701
E: jhill@pageseager.com.au
