Introduction
When, on 30 January 2012, the transition from the old system of company charges under the Corporations Act and bills of sale under the Bills of Sale Act, to the new Personal Property Security regime under the Personal Property Securities Act 2009 (Cth) (PPSA) took place, I must confess that I only took a passing interest in the PPSA and the new regime which it created. After all, my clients were all “borrowers” rather than “lenders” and hotel leases prohibited the lessee from charging the hotel licence. After all, how could the lessee charge what it didn’t own?
This state of indifference was dramatically brought to an end on 27 June 2013, by the decision of Brereton J. in Maiden Civil (P&E) Pty Limited and Ors v. Queensland Excavation Services Pty Limited & Ors [2013] NSWSC 852 (Maiden Civil Case).
The Maiden Civil Case
From the commentaries which I have read, the Maiden Civil Case is the first decision under the new PPSR regime. It involved a priority contest between a lessor of earthmoving equipment on one hand and the receivers of the lessee and the lessee’s secured creditor, on the other.
The lessor of the earthmoving equipment (Queensland Excavation Services Pty Limited) (QES) leased three items of earthmoving equipment to Maiden Civil (P&E) Pty Limited (Maiden Civil). The lease of this equipment was not in writing, however, nothing turns upon this. Under the lease, Maiden Civil took possession of the earthmoving equipment and some time afterwards, approached a private lender for short term finance. Maiden Civil listed the earthmoving equipment amongst its assets, which then was the subject of the usual loan documentation, giving rise to a security interest under the PPSR regime. The lender then registered its security interest over Maiden Civil.
Brereton J. at [11] observed that “although the case ultimately falls to be resolved according to the system of priorities established by the PPSA, the notion of title – or ‘true ownership’ is not irrelevant”. Out of the three items of earthmoving equipment, QES was held to be the legal owner of two of them. But this was irrelevant.
QES had a “security interest”, within the meaning of the PPSA, in the two items earthmoving equipment which it owned. The point of failure for QES however, was that it did not register its security interest and accordingly, lost on the question of priorities between it and the lender to Maiden Civil.
At [21] to [25] Brereton J. explained how the competing security interests arose. It was held that the security interest of the lender arose pursuant to s.19(5) of the PPSA. At [26] it was held that pursuant to s.19(5), Maiden Civil as a PPS lessee in possession of the earthmoving equipment, had rights in that equipment, to which a security interest could attach.
From [26] to [31] Brereton J. then compared the PPSA against its New Zealand and Canadian counterparts and examined the leading decisions of the New Zealand and Canadian Courts. At [32] it was observed that the Commonwealth Parliament modelled the PPSA on the New Zealand and Canadian legislation and therefore the Australian Courts should take the same approach as established by the New Zealand and Canadian Courts.
For those not familiar with the PPS regime, this article published in the McGill Law Journal and quoted in a New Zealand decision of Graham v. Portacom New Zealand Limited [2004] 2 NZLR 528 (referred to by Brereton J. at [28] to [29]), may assist:
“The internal logic of Article 9 and PPSA priority regime is premised in a rejection of derivative title theory in favour of registration as the principal mechanism for ranking priority both amongst secured creditors and as between the secured creditor and the debtor’s general creditors including the trustee in bankruptcy. To give effect to this intent, ‘rights in the collateral’ must be understood as requiring a mere bare right to possession or a power to convey a greater interest than has the debtor, a point conferred in the PPSA jurisdiction and expressly stated in some of the more recent PPSA’s. On this interpretation, ostensible ownership – in the radical sense of bare possession or control of the collateral – has effectively replaced derivative title for the purposes of determining the scope of the secured debtor’s estate at priority level. Thus, by the very act of deeming a true lease to be a PPSA security interest, ownership in the leased assets is effectively vested in the lessee as against the lessee’s secured creditors and trustee in bankruptcy.”
What is not observed in this article however, is that ownership is also effectively vested against the lessor’s interest, which was the ultimate outcome in the Maiden Civil Case.
Therefore as between QES and the lender to Maiden Civil, there was a question of priorities which was easily resolved by Brereton J. by the simple fact of the lender’s interest being registered and QES’ interest was not. Therefore, because of priority, Maiden Civil’s lender was able to enforce its rights as against third parties (including QES) by virtue of s.20 of the PPSA. Brereton J. examined the applicability of s.20 and found all of its elements to be satisfied (see [39] to [40]).
So how is this relevant to a hotel landlord and its hotel licence?
The relevance of the Maiden Civil case to a hotel landlord is this – today, the majority of hotel leases in New South Wales expressly state that the landlord is the owner of the hotel licence and the poker machine entitlements (PMEs) and any poker machine permits (PMPs) allocated or held in respect of that licence. Hard lessons have been learned by hotel landlords, since the early PME dispute cases of Wonalle Pty Limited v. Clarence Property Corporation Limited [2003] NSWSC 497 and Jabetin Pty Ltd v. Liquor Administration Board [2005] NSWCA 92 (Jabetin’s Case). Those decisions, and the others which have followed, have been extensively commented upon by authors such as myself.
The hard lesson now learned from the Maiden Civil Case is that despite all to the protections that you can build into a hotel lease, that does not protect the interest of the landlord in the hotel licence, PMEs and any PMPs, from a security interest which the lessee may grant in favour of its lender, which the lender will register under the PPSA and thereby establish priority to the landlord.
The PPSA and the Hotel Lease
Normally you would think that the hotel lease would be sufficient to create a registrable interest over the licence, PMEs and any PMPs which the landlord could register under the PPSA. Therefore the lease would establish a priority as against the lessee, the lessee’s lenders and the holders of other security interests over the lessee. However, this is not the case.
The PPS regime is about registering interests over “personal property”, as defined by the PPSA. Section 10 of the PPSA is the Dictionary to the Act and defines personal property to be “property” (in the broad sense because it is not defined) other than “land” (as defined). Interestingly, the exclusion from personal property also includes a “right, entitlement or authority” that is granted by a State law and declared not to be personal property for the purposes of this Act. Statutory licences under the various State and Territory liquor and gaming regimes, are potentially able to be excluded from the personal property regime, had the relevant Acts made such a declaration. In New South Wales however, neither the Liquor Act 2007 or the Gaming Machines Act 2001 have made such a declaration. Therefore the hotel licence, PMEs and PMPs are all “personal property” for the purposes of the PPSA.
Returning to the land exclusion from personal property definition, “land” is inclusively defined to be “all estates and interests in land, whether freehold, leasehold or chattel, but does not include fixtures” (see s.10). Also s.8 contains express exclusions from the operation of the PPSA, including the creation of an interest in land (s.8(1)(f)(i), which a hotel lease is.
If land and any interest in land, is not personal property and is specifically excluded from the operation of the PPSA, then a hotel lease cannot be a security agreement and therefore establish a security interest.
However, it may be argued that a hotel lease is over more than simply the land. It includes the right of the lessee (through itself or through its nominee) to exercise the hotel licence, PMEs and PMPs as well as use the hotel equipment that might belong to the landlord. Therefore because the lease applies to these other items, would it be capable of also being a security interest in respect of those items and would the PPSA have operation, despite the s.8 exclusion?
To answer this question you have to turn to the definition of “security interest” in s.12(1) of the PPSA. A security interest means “an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property)”.
Section 12(2) provides by way of example, a number of transactions by which security interests in personal property arises. The usual fixed and floating charge and chattel mortgage are listed. So too is a “lease of goods (whether or not a PPS lease)” (s.12(2)(i)).
Under s.12(3), security interests also includes three other transactions, whether or not the substance of the transaction secures payment or performance of an obligation. The interests of a “lessor or bailer of goods under a PPS lease” is mentioned (s.12(3)(c)). A hotel lease is not a PPS lease, according to s.13(2) as a hotel lessor would not be “regularly engaged in the business of leasing goods” (s.13(3)(a)).
Therefore there is a strong case against a hotel lease being a security agreement. Besides which, the stakes are so high for the landlord, that I would not encourage any landlord to take the risk and seek to establish a registrable security interest by the lease alone.
What other document could establish a registrable security interest?
It is commonplace for hotel landlords to require their lessee and the lessee’s nominee, to enter into a “Licensee Deed”. In such a deed, the licensee repeats covenants which the lessee gave in favour of the landlord under the hotel lease, as regards protecting the landlord’s interest in the licence, PMEs and PMPs. Without such a Licensee Deed, of course, there is no direct privity of contract between the landlord and the licensee.
Accordingly, Licensee Deeds could be expanded upon to create registrable security interests, capable of registration by the landlord over the lessee and (potentially) the licensee. However, as a matter of practical circumstance, registering a security interest over the licensee (which in many cases will be a mere employee, whose employment could be terminated at any time), would appear to be “overkill”. Additionally, the real concern, is the contest that may arise between the landlord on one hand and the lessee and its lender on the other, with the lender first registering a security interest over the licence, PMEs and PMPs.
So how can the lessee charge something that it doesn’t own?
This is the whole point of the Maiden Civil Case. Borrowing again from the McGill Law Journal Article: “The internal logic of the Article 9 and PPSA priority regime is premised on a rejection of derivative title theory in favour of registration as the principal mechanism for ranking priority …”
As between the lessee and its lender, there is no contest as to whether or not the lender has a security interest – the lessee simply gives a charge over all of its present and future property. The interest which the lessee has over the licence, PMEs and PMPs, that is capable of becoming a security interest, arises because (for the purposes of s.19(2)) the lessee (as grantor) has rights in the “collateral” or the power to transfer rights in the collateral to the secured party (the lender) – see s.19(2) PPSA. The Dictionary to the PPSA defines “collateral” as being personal property to which a security interest is “attached”. Personal property includes the licence, PMEs and PMPs.
You might argue that the lessee has no rights in the licence, PMEs and PMPs, as the hotel lease clearly states? So how could the lessee charge them? This is the whole point of the Maiden Civil Case – Maiden Civil was in possession of the earthmoving equipment and that was enough. In terms of what rights a lessee would have under a hotel lease, even if the lease did not expressly say so, it could be readily implied that the lessee has the right to use or exercise the licence for the term of the lease. Also the lessee, through its nominee, was in possession of the licence, as its nominee was the licensee. Therefore the hotel lessee has “a right”, which is capable of giving rise to a security interest.
Furthermore, s.19(2)(a) refers to the grantor having rights in the collateral or the power to transfer rights in the collateral. The lessee has “power” to transfer the hotel licence under the Liquor Act 2007, because either it or its nominee, is the holder of the licence and therefore has the statutory right to make the transfer application. It does not matter that the hotel lease expressly prohibits such an application being made without the landlord’s prior written consent. If the hotel licence is transferred, then the PMEs follow, as observed in Jabetin’s Case.
Conclusion
The Clarion Call arising from the Maiden Civil Case is this – if you have a right which is capable of registration under the PPS regime and you fail to do so, then you do so at your own peril. Others may register security interests ahead of yours and if they do, your rights are defeated.
Some of the major law firms have published client alerts, warning of the above risks, as demonstrated in the Maiden Civil Case.
I have a considerable doubt whether a hotel lease may establish a registrable security interest under the PPSA. As stated, the stakes are so high for the landlord, that I would not recommend any lessor taking a risk that it does. Strip the licence, PMEs and PMPs from the hotel, then its value is no more than land, bricks and mortar. Its value as a trading hotel with gaming machines is gone.
Licensee Deeds with the lessee and hotel licensee, need to be expanded upon so that the lessor’s interest becomes a security interest under the PPSA and capable of registration.
All of this is fine for hotel landlords about to enter into a new hotel lease. But what about landlords where the lease is already on foot and has many years left to run?
They simply cannot do nothing. Possibly, the lessee might be in breach of a covenant in the hotel lease, prohibiting the granting of any mortgage or charge without the landlord’s consent. In that case, the landlord might be able to force the lessee and its lender to enter into a priority deed and at the same time, enter into a new Licensee Deed and register a security interest under the PPSA.
18 July 2013
Bruce Bulford
Bulford Legal Pty Limited
Lawyers
Level 2, 23-25 O’Connell Street, Sydney NSW 2000
GPO Box 3772, Sydney NSW 2001
Phone Number: (02) 9232 2000
Email: bab@bulfordlegal.com.au
