If you lease a commercial property, you need to know the answer to this question
By now, everyone has heard about the Personal Property Securities Register (PPSR), which came online on 30 January 2012. However, the implications of the new registration system are still not widely known. Unfortunately for many people, the need for registration is only discovered after it is too late.
One of the less intuitive extensions of the new system is to commercial leases. While real estate of any kind is excluded from the PPSR, commercial leases still invariably involve personal property of some kind – most commonly the fittings or fit-out of the premises, the cash security bond, and any abandoned goods left behind by the tenant after vacating.
So how can you, as a landlord, ensure your rights to personal property are protected?
Step 1: Ensure your commercial lease contains a PPSA clause
If your lease does not have a PPSA clause setting out your rights in relation to protection of security interests in personal property under the Personal Property Securities Act (PPSA), then your lease is in need of an update.
We would expect to see a clause that expressly allows the landlord to register and enforce security interests in personal property under the lease. The clause will also typically include a waiver of some of the rights that the tenant would otherwise have under the PPSA. The clause does not have to be lengthy or complicated, but you should obtain proper advice on its terms to ensure that it is effective.
Step 2: Take stock of the personal property at risk
As a landlord, it is a good idea to keep tabs of any property at risk under the lease, and yet so few landlords give a second thought to anything once they have signed on the dotted line.
The reality is that there are two important types of property that are at risk in a commercial lease scenario: the landlord’s own property in the form of fittings and fit-out, and the tenant’s security bond. The fittings and fit-out are at risk because they pass into the tenant’s possession for the duration of the lease, which means they are potentially up for grabs for a registered creditor of the tenant. Similarly, because the tenant’s security bond is usually in the form of cash, the bond is also personal property that could be claimed by a registered creditor of the tenant.
To protect yourself against any nasty surprises, you should register your interest in any valuable fittings or fit-out in the premises at the commencement of the lease. You should also register your interest in any cash bond the tenant has provided as security when you receive the security, even if you control the bank account it is kept in. In the cases of cash bonds, security should be registered over both the tenant and the relevant bank account.
Step 3: Bullet-proof your director’s guarantee
If the tenant’s director has given a personal guarantee for the lease, whether it falls within the scope of the PPSA depends on the guarantee terms.
If your guarantee contains a charging provision where the director agrees to charge their personal property as security for the tenant’s performance, this will fall within the PPSA regime. That means one thing: fail to register at your own peril.
Step 4: Securing your ownership of any abandoned goods
Most commercial leases already contain a clause that provides that any goods abandoned at the premises at the expiry or termination of a lease become the property of the landlord. This type of clause now gives rise to a registrable security interest in favour of the landlord. The tricky part is that the interest needs to be registered at the commencement of the lease. Accordingly, a landlord will need to make an early determination about whether the tenant has any goods that, if ultimately abandoned, would have value to the landlord.
The PPSA also has an impact on how abandoned goods must be dealt with by the landlord. In particular, a landlord now has an obligation to search the PPSR to see if there is any valid security interest registered over the abandoned goods. In many cases, it is likely that the landlord’s claim to the goods will be trumped by a registered creditor.
The lesson for every landlord is that they should audit their commercial leases to ensure that they stack up. Without proper measures in place, there is a very real risk of getting caught in a PPSA trap in the future.