Sale of Land and the PPS Act

Personal property included in the sale of a land may be subject to a security interest registered on the Personal Property Securities Register (PPS Register).

Goods

Under the PPS Act personal property includes tangible property. Tangible property includes goods. Goods that are commonly sold as part of the sale of land include window furnishings, pool equipment, garden furniture and light fittings.

Any goods included with the sale of land, may be subject to a security interest which has been registered on the PPS Register.

Licenses

Sometimes a vendor will transfer a licence to a purchaser as part of the sale of land. Examples include: a licence to use some adjoining land, unused road licence, liquor licence, licence to graze stock, licence to use a boat ramp and/or a pipeline.

Any licence to be transferred to the purchaser may be subject to a security interest which has been registered on the PPS Register.

Leases

The PPS Act may apply to the lease of the land because:

• The vendor may have leased goods to the tenant. This may give rise to a PPS Lease.
• The vendor may have obtained a cash security deposit from the tenant. For the purposes
• of the PPS Act a cash security deposit creates a security interest and the vendor becomes a secured party.
• The vendor may have provided a lease incentive to pay for the tenant’s fitout. The PPS Act may apply where the vendor retains rights over the fitout.
• When a tenant vacates premises, goods may be abandoned. The PPS Act may apply to the vendor’s right to deal with the goods.

Practitioner should refer to the LPLC Bulletin, ‘Land leases and the PPS Act’ for information about how the PPS Act affects leases.

Most domestic residential property sales will not be affected by the PPS Act

The PPS Act does not apply to the lease of a furnished residential property. See exclusion of ‘consumer property’ in s.13(2)(c).

The PPS Act does not apply to land. Refer to the definition of ‘personal property’ in s.10 and s.8(1)(f)(i)

The PPS Act does not apply to fixtures. See s.8(1)(j).

Section 46 provides that a purchaser takes personal property free of any security interest where the sale is in the ordinary course of the vendor’s business provided that:

• the buyer does not hold the personal property as inventory; and
• the buyer has no actual or constructive knowledge of a breach of the security agreement.

Section 47 provides that a purchaser takes personal property free of any security interest if:

• the personal property is used for personal, domestic or household purposes and ‘new value’ (if new) is not more than $5000 or otherwise the market value is no more than $5,000; and
• the buyer has no actual or constructive knowledge of a breach of the security agreement

While s.47 is not clear, it is expected that the $5,000 limit relates to each item of personal property.

For example, a purchaser will take free of a security interest, where second hand goods are sold with land (such as window furnishings or pool equipment), and where each item has a market value of less than $5,000.00.

Search the Personal Property Securities Register

The vendor’s practitioner needs to know what security interests are registered over the personal property involved in the sale of the land because the grantees (those who hold the security interests) will need to be informed of the sale and in most cases the interests need to be released.

The vendor’s practitioner should search the register to find any security interests registered in the name of the vendor. To do that, the practitioner will need to know certain information, such as:

(a) name and date of birth of any individual grantor;

(b) name of any organisational grantor;

(c) ACN for any organisational grantor;

(d) ABN for any organisational grantor that has an ABN;

(e) ARBN for any organisational grantor that has an ARBN; and

(f) ARSN for any organisational grantor that is the responsible entity of a registered scheme, if the scheme has an ARSN.

Specific security interests can also be searched if the vendor has the registration number ie the number allocated to the financing statement upon registration on the PPS Register.

Beware!

Sometimes searching the PPS Register alone is not enough to find all security interests.

In some circumstances it is not necessary to register a security interests on the PPS Register: for example where the secured party has perfected the security interest by possession. See s.21 and s.24 of the PPS Act.

Control of the personal property is, in some circumstances, effective to perfect a security interest. See s.21, s.25 – 29 of the PPS Act.

Practitioners should also refer to the factsheet “Searching the PPS Register – Considerations regarding migrated registrations” available from the “Factsheets” page under the “Ask the Registrar” tab at www.ppsr.gov.au. In this Fact Sheet you will find some tips on how to search for a grantor. For example, this Fact Sheet explains that, the form in which the name of an individual appears on the PPS Register, will depend on which register it was migrated from. As a result it may be necessary to search by one or more family names or a first name, the initial of the second given name and the family name.

The practitioner should give details to the vendor client of any registered security interests and also ask the client whether or not they are aware of any unregistered ‘encumbrances’ so that these can be dealt with in the contract, as necessary.

Release of security interests

The purchaser will clearly want any security interests released at settlement.

In most cases, the practitioner acting for the vendor, will be instructed to obtain any necessary releases. If the client elects to arrange the release of any security interests for settlement purposes, then clear written advice should be given to the client as to what is required and when and the consequences of failing to do this.

The purchaser may also want any registered security interests, not only released but also removed from the register by having the secured party lodge a financing change statement.

Some security interest registrations will relate to just the assets in question and it will be relatively simple to have that security interest removed where the secured party registers a financing change statement that states the security interest is discharged.

Where the personal property being sold is part of the collateral in an all present and after acquired property security interest (an ALLPAAP) then a financing change statement can also be lodged removing the specific property from the registration.

However, where the personal property being sold makes up just part of a class of goods included in a financing statement it can be more problematic. Individual goods cannot be removed from a ‘non ALLPAAP’ financing statement without lodging a new financing statement with the particular goods omitted. Lodging a new financing statement would result in a loss of priority for the security holder.

In some instances, the form of release will contain an undertaking that the secured party will lodge a financing change statement within a certain time following settlement, usually 10 business days. In other instances the financing change statement will be lodged prior to settlement, which may remove the need to obtain a release.

Form of release

Practitioners should carefully consider the wording of the form of release.

The Australian Banker’s Association has issued a form for use by banks when releasing a security interest. This form is available at:

https://www.ausbanking.org.au/...

Beware!

• Some banks are not using this form of release.

• Some banks are using a modified version of this form.

• Non-banks will probably have their own form of release.

• A financing change statement cannot be registered in certain circumstances, for example for a ‘non ALLPAAP’ security where only some collateral is released.

• The ABA release is issued in favor of the grantor/vendor i.e. not the purchaser.

• Some releases provide that the security holder will lodge the financing change statement within 10 business days of providing the release.

Some contracts of sale of real estate may not include a PPS Act clause.

General condition 7

A PPS Act clause, general condition 7 (GC7) was included in the March 2012 version of the contract of sale of real estate, as prescribed by the Estate Agents (Contracts) Regulations 2008.

The LIV has published a new version of the contract of sale of real estate dated August 2019. Refer to GC 11 in relation to release of security interest.

The following should be considered in relation to GC 11:

• The word ‘property’ is used in GC 11 This may give rise to some confusion as to whether or not the property is only the land or includes any personal property. Consider defining ‘property’ as the land plus any ‘personal property’ for the purpose of GC 11.
• GC 11.2 requires the vendor to provide their date of birth. Consider imposing an obligation on the vendor to provide evidence of their date of birth. For example a certified copy of a driver’s licence.
• Consider imposing an obligation on the vendor, that the vendor will not allow any PPS Register registrations to occur after the day of sale in relation to any personal property sold to the purchaser.

Other matters to consider

In addition to the matters raised in relation to GC 11, practitioners should consider the following matters:

• Where there is no PPS Act clause in the contract, a condition to require any or which security interest to be released. For example, a release of a security interest over any goods included in the sale.
• Include any relevant PPS Register registration numbers in the contract for the avoidance of any doubt especially in relation to describing the releases which must be provided at settlement.
• Where a full release is to be provided, a condition in the contract that any relevant secured party will register the necessary financing change statement within a reasonable specified period after the release being provided.
• An obligation imposed on the vendor to procure the grantor to do all things necessary to enable the transfer of any security interest to the purchaser. For example, the vendor may have registered a security interest over a cash deposit given by the tenant. Depending on the wording of the lease, the tenant (or grantor) may need to assign the security interest to the purchaser.
• Where assets include goods and fixtures, prescribe in the contract which items are goods and which items are fixtures. This will avoid a dispute as to which items require a release because the PPS Act does not apply to ‘fixtures’ so no release is required.
• It may be that a release is required in relation to the land and fixtures for charges previously registered with ASIC. Although ASIC charges will be migrated to the PPS Register, the PPS Register can only apply to the personal property the subject of the charge. The existence of the old ASIC charge on the register is notice of an equitable charge over land and any fixtures which should be released to protect the purchaser prior to registration of the transfer of land.

Advice pre-contract

Where a purchaser’s practitioner has been given the opportunity to see the contract of sale of real estate before it has been signed the following should be considered in relation to the PPS Act.

Discuss with the client if there is any personal property included in the sale that is worth more than $5,000. See the discussion about what might be included in a sale of land in the “Personal property” section of this bulletin. Most residential property sales are unlikely to have personal property worth more than $5,000 and so be unaffected by the PPS Act.

Consider whether the contract contains the conditions discussed in the section of this bulletin, “Contract of sale of real estate”. Negotiations should be entered into in relation to those issues if the contract is silent and/or in relation to any special conditions(s) which replace and/or amend GC 11.

A search of the PPS Register should be made to determine if there is any security interests registered over the personal property included in the sale. Where the vendor is a natural person, their name and date of birth will be required. If it is not listed in the contract you will need to ask the vendor’s practitioner for it. A contract should not be entered without this information if the sale includes personal property, that you think will be worth more than $5,000.00 (see paragraph numbered 2.4 in relation to the ‘value’), especially where a release will be required at settlement.

Where there are any security interests, the practitioner should discuss with the purchaser whether a release is required.

Advice where the client has already signed the contract

Where a purchaser’s practitioner has not been given the opportunity to review the contract of sale of real estate before the purchaser signed, the following should be considered in relation to the PPS Act.

Discuss with the client if there is any personal property included in the sale that is worth more than $5,000. See the discussion about what might be included in a sale of land in the “Personal property” section of this bulletin. Most residential property sales are unlikely to have personal property worth more than $5,000 and so be unaffected by the PPS Act.

If there is personal property that may be affected by the PPS Act included in the sale, look at the contract of sale for the issues raised in the “Contract of sale of real estate” section of this bulletin.

A search of the PPS Register should be made to determine if there is any security interests registered over the personal property included in the sale. Where the vendor is a natural person, their name and date of birth will be required. If it is not listed in the contract you will need to ask the vendor’s practitioner for it.

Where there are any security interests over the assets being acquired, the practitioner should discuss with the purchaser the need to obtain a release of any security interest at settlement.

GC 7 and release of a security interest

Practitioners should note the 21 day deadline in GC 11.11. This means a request to provide a release of a security interest must be made 21 days before settlement.

It is recommended that as soon as the contract is signed and exchanged, the practitioner acting for the purchaser should immediately make the request for any necessary release(s) to be provided at settlement. At the same time the practitioner should request a release of any land and/or fixtures that may be subject to a charge formerly registered with ASIC.

Purchaser’s financier

If a practitioner acting for the purchaser is asked to advise on the purchaser’s finance documents he/she should carefully consider any clauses in relation to the PPS Act.

Common provisions include:

• Requiring the client to “do anything” the bank requires in connection with the PPS Act. This seems very broad and the possible impact of this should be highlighted to the client
• Contracting out of any notices that the financier is able to under the PPS Act, for example, the right of the client to receive notice of registrations on the PPS Register. See s.157 of the PPS Act.
• Contracting out of providing any information requested by interested parties under s.275 of the PPS Act.
• Stating that the purchaser will be in default if there is a registration of any new security interest. This may be a problem because there could be many further security interests created by the purchaser where the purchaser operates a business or buys other real estate.

Special attention should be paid to the impact that the PPS Act may have where a vendor provides finance to a purchaser. For example, a vendor may want to register a security interest over the purchaser’s personal property as security for repayment of the vendor’s loan to the purchaser. This security interest (often arranged at the last minute) may cause the purchaser to be in default of other security interest obligations.

Practitioners should consider including a statement in their retainer letter/agreement about their role in relation to the PPS Act and the matters raised in this Alert.