Australia: PPSA and Fixtures - Can the problem be fixed?

This article is the final instalment in a 3 part series by the author discussing whether the exclusion of fixtures from the scope of the PPSA is appropriate.

The first article discussed the common law rules relating to fixtures and the Canadian mechanism for overcoming the issues associated with those common law rules.

The second article analysed why both the NZ and Australian drafters elected to exclude fixtures from their respective personal property securities legislation.

1. Introduction

The Personal Property Securities Act 2009 (Cth) (PPSA) commenced on 30 January 2012. The PPSA is largely based on Canadian¹ and New Zealand² (NZ) interpretations of the American Article 9 regime.³

However, despite the many similarities between the Canadian and NZ Acts, the Australian drafters, in a marked departure from their Canadian counterparts, elected to follow the NZ approach and exclude fixtures from the scope of the PPSA. As a result of this omission, the determination of whether chattels have become fixtures remains governed by the unsatisfactory common law.⁴

This article will suggest possible amendments to the PPSA and consider how secured parties can protect their interest in fixtures now the PPSA has commenced.

2. Proposed Amendments

The author's second article⁵ discussed the fixture provisions contained in the Canadian Act⁶ , explained how those provisions provided a mechanism for determining priority disputes between fixture financiers and mortgagees in Canada and recommended Australia adopted similar provisions in the PPSA.

However, the Canadian provisions are not without fault. If Australia is to adopt a fixture financing regime, the author considers the Australian drafters should learn from some of the problems experienced in Canada and amend any fixture provisions before they are included in the PPSA.

This article will now discuss proposed amendments to the Canadian fixture provisions that the author considers will overcome some of the issues currently experienced in Canada.

2.1 "Secret" Security Interests
Section 36(3) of the Canadian Act grants a fixture financier priority over a party with an interest in land at the time the fixture financier's security interest attaches⁷ to the collateral i.e. before it is perfected by registration.

This section has been criticised because it allows fixture financiers priority over prior mortgagees even if the security interest is not registered on either the land titles register or Personal Property Securities Register ("PPSR").⁸ This can result in what is known as a "secret" security.⁹

In the author's view, for Canadian fixture provisions to work in Australia this section must be amended to require the fixture financier's security interest to be registered on at least the PPSR and, preferably, the relevant land titles register¹⁰ in order to gain priority over a party that has an interest in the land.

2.2 Circular priorities
The interrelationship between the fixture provisions and the Canadian land titles registers has caused confusion in Canada. The confusion arises because although section 36 specifies how a priority dispute is to be resolved between a single fixture financier and a single mortgagee, it fails to resolve the priority between the fixture financier and other registered encumbrances on the land titles register.

The case of GMS Securities & Appraisals v Rich-Wood Kitchens Ltd¹¹ provides a relevant example. In that case National Trust (NT) took a registered mortgage of land. Rich-Wood Kitchens (R) sold kitchen cabinets to the land owner under a retention of title arrangement. Those cabinets were affixed to the land, but R failed to perfect its security interest in the fixtures on the land titles register. GMS Securities (GMS) took a second mortgage on the land. The land owner subsequently defaulted on its obligations to NT, R and GMS.¹²

The Court found that a circular priority issue arose because although R had priority over NT because of its registration on the PPR, GMS had priority over R because R failed to register a fixtures notice on the land titles registry, but GMS was subordinate to NT by virtue of the land titles priority regime.¹³

The Court held that R had priority because to find that NT had priority would be 'unjust and make a mockery out of the system of security registration.'¹⁴

To overcome this issue in Australia the author recommends the Australian drafters include a provision that provides that in a circularity problem, either the PPSA priority system or the land titles priority system will prevail.¹⁵ Given Australia's reliance on the Torrens System of land registration, the author considers any amendment to the PPSA should provide that the land title system prevail over the PPSA in such circumstances.¹⁶ While this will not prevent circularity problems from arising it will provide a mechanism for resolving such a dispute.¹⁷

2.3 Definition of Fixtures There has been much deliberation about whether the personal property securities' acts should include a comprehensive definition of fixtures.¹⁸

There have been many attempts at including such a definition in the Canadian Act and its Article 9 regime counterparts. For over 20 years, drafters experimented with various definitions¹⁹ starting with a broad definition that focussed on the harm removal of the goods would have on the land²⁰ to a complicated definition that tried to capture the common law tests with a number of exceptions and then back to a definition that relies on the common law.²²

The initial drafts of both the NZ Act and the PPSA²³ included definitions that largely mirrored the Canadian Act, but which were subsequently removed when both jurisdictions elected to exclude fixture provisions from their legislation.²⁴

It is the author's preferred view that fixtures remain undefined in the PPSA. While advocates argue a definition would likely overcome the confusion surrounding the common law rules and provide fixture financiers some comfort about the types of chattels that are likely to become fixtures, it is the author's view that it is not currently possible to define a fixture with any degree of certainty.²⁵

That is because neither goods nor society remain stagnant. As a result, defining fixtures would likely require broad brush amendments over time to suit advances in technology and changing tastes and habits about what should be regarded as a fixture.²⁶ The inclusion of a broad definition is also unlikely to work as defining terms vaguely will often result in confusion and injustice.²⁷

The answer may lie in the abandonment of the concept of fixtures for the purposes of the PPSA,²⁸ instead including a new priority rule that determines priorities between chattel interests and interests in land.

2.4 Security Interests in Existing Fixtures
Section 36(3) grants a fixture financier priority over goods that have already been affixed to land. This provision is unusual because secured parties will generally only be interested in security interests when they have supplied the goods or provided the funds to purchase the goods.²⁹

The author considers any inclusion of a fixture provision in the PPSA should:

• omit any section 36(3) style provision. That is because a PMSI, by its very definition, cannot be granted over an existing fixture.³⁰ An existing fixture is real property and an interest in it can be obtained through real property law.³¹
• be limited to PMSI creditors i.e. those that have advanced funds for the purchase of the goods or provided the goods on retention of title terms. That is because it is more likely that a secured party will finance the purchase of a good that becomes a fixture rather than a fixture itself.

By limiting the security interest in fixtures to those secured parties who have assisted the debtor/borrower in getting his/her interest in the fixture, the scope of unfairness to mortgagees is diminished.³² While some might argue this may result in mortgagees discounting the value of land, it constitutes a more predictable discounting requirement than is presently the case.³³

The amendments would also protect those who have a legitimate interest in the fixtures. Only PMSIs ought to have the priority afforded to fixture financiers.³⁴

2.5 Accessions
The omission of a provision dealing with fixtures from the PPSA is particularly curious as both the NZ Act³⁵ and the PPSA³⁶ follow the Canadian Act's treatment of accessions which is nearly identical to the fixture provisions in the Canadian Act.³⁷

The inclusion of these sections only makes sense in light of the Canadian fixture provisions and results in an inconsistency in the treatment of particular security interests. For example, a manufacturer may sell wood on retention of title terms. One customer buys the wood to make a chair and the second to manufacture window frames that are installed in a house. In the first example, the seller's security interest would be protected in the wood as an accession, but any security interest in the window frames would be lost upon becoming affixed to the house.³⁸

The inclusion of accession provisions in the PPSA without a corresponding provision for fixtures is anomalous and to some extent inconsistent with the general priority scheme of the PPSA.³⁹ To treat goods that become affixed to other goods differently to goods that become affixed to land results in unjust outcomes for fixture financiers and should be remedied to overcome this inconsistency

.

2.6 State Land Titles Register approval
The effectiveness of the Canadian regime relies on the ability of a fixture financier to recognise chattels that are likely to become fixtures and promptly file a notice on the land titles register to protect that interest. Even if the definition of fixtures continues to cause confusion, filing on the land titles register clarifies that confusion.⁴⁰

If the PPSA is amended to include fixture provisions then Registrars of the relevant State-based land titles registers must also acknowledge a notation on title is the best course of action for borrowers and fixture financiers.

The fact that it may be difficult to get the States and Territories to agree to registration of fixture notices in each of the State and Territory-based land titles registers does not detract from the certainty that would be achieved by requiring fixture financiers to register such a notice to protect their priority interest in the chattels.

However, the States are renowned for their inward focus on such issues and the author concedes this will be no easy task. Perhaps, if the issue cannot be resolved promptly, the resolution lies in the national electronic conveyancing program.⁴¹ In any case, the issue must be resolved promptly.

2.7 Contrary to intention of PPSA
The final point is that the exclusion of fixtures from the PPSA is contrary to the intention of the PPSA, which places a high value on commercial certainty,⁴³ fairness and justice in typical cases. There is no commercially sound reason to give priority to a prior mortgagee over a subsequent registered fixture financier. Instead, the exclusion of fixtures from the PPSA is likely to make secured creditors reluctant to finance the acquisition of chattels of a kind that normally become fixtures as they will have little assurance that they can protect their security interest in those chattels.⁴⁴

3. Interim Protection

Although the common law determination of priorities in fixtures is uncertain, there are steps a fixture financier can take to protect its security interest until the PPSA is amended. For example:

• Ensure the fixture financier's security interest is perfected by registration on the PPSR.
• Enter into agreements with all those that have an interest in the land to which the chattels are, or may become, affixed:
• obtaining their consent to the affixation;
• granting the fixture financier a right to enter the property and retake possession of the chattels upon default; and
• obliging the borrower/grantor to advise the fixture financier if a notice of default is issued by the mortgagee;⁴⁵ and
• Obtain a declaration or undertaking from the borrower/grantor that the chattel will not be affixed to the land.⁴⁶

Of course, the above recommendations must be obtained before any moneys are advanced or goods supplied. Because of the inconsistencies in the application of the common law rules relating to fixtures there remains a risk that chattels will become affixed to land without a fixture financier's knowledge. In which case, the fixture financier's security interest in those goods will be lost unless the mortgagee and borrower are willing to enter into such agreements after the event. In the author's experience this is unlikely.

4. Conclusion

The Australian drafter's election to follow the NZ Act and exclude fixtures from the scope of the PPSA means there is no easy way fixture financiers can protect their security position in those chattels as they will not usually have any basis for registering or claiming priority under the land titles legislation.⁴⁷

Although the fixture provisions in the Canadian Act do not do away with the common law doctrine of fixtures they do provide a clear methodology for determining disputes between mortgagees and fixture financiers. However, Australian drafters would do well to amend the Canadian fixtures provisions before including them in the PPSA so as to overcome the issues identified in this paper.

¹Personal Property Security Act, RSS 1993, c P-6-2 (the Canadian Act).
²Personal Property Securities Act 1999 (NZ) (the NZ Act).
³The original personal property securities legislation is contained in Article 9 of the American Uniform Commercial Code (US) (the UCC), which was closely followed by the first Canadian personal property security legislation in Ontario. The scope of this paper does not allow a detailed analysis of the Article 9 or Ontario regimes. For a detailed discussion on that legislation refer to Frank Bennett, Bennett on PPSA Ontario, (CCH Canadian Limited, 1991); Stephen L. Sepinuck, Practice under Article 9 of the UCC, (American Bar Association, 2nd ed, 2008).
⁴Personal property is defined in the PPSA to mean property (including a licence) other than land: section 10 of the Personal Property Securities Act 2009 (Cth)). Land is defined to include all estate and interests in land, whether freehold, leasehold or chattel, but does not include fixtures. Fixtures are defined as goods, other than crops, that are affixed to land. Section 8(j) of the PPSA states that the PPSA does not apply to an interest in a fixture. The result is that, even though fixtures are personal property for the purposes of the PPSA, its provisions do not apply to regulate security interests in fixtures: Andrew Boxall, Allens Arthur Robinson, Security Interests under the Personal Property Securities Act 2009 (Cwth): Threshold Issues in Ship Finance,
(10 November 2010) Federal Court .
⁵Amanda Bull, 'Fixtures and the PPSA 2009: Fuzzy Logic?'(2011) 27(5) Australian Banking & Finance Law Bulletin 93.
⁶A detailed analysis of s36 of the Canadian Act is outside the scope of this paper. For a useful discussion refer to Bull, above n5 and Baas, Susan, 'Fixtures under the Personal Property Securities Act: What New Zealand Doesn't Know It's Missing' (2001) 19 New Zealand Universities Law Review 404.
⁷A security interest attaches to property (known as collateral in the PPSA) when the grantor has rights in the collateral or the power to transfer rights in the collateral to the secured party and either value is given for the security interest or the grantor does an act by which the security interest arises: section 19 of the Personal Property Securities Act 2009 (Cth). For example, signing a letter of offer, security documents or a bailment agreement.
⁸This issue arises because section 36 of the Canadian Act allows a fixture financier to obtain priority over a land mortgagee when its security interest attaches to the collateral ie prior to perfection by registration. See for example, Bruce MacDougall, 'Fixtures and the PPSA: Of the Wooden Horse of Troy, Creditors in the Weeds and Statutory Ambush' (1993) 72 The Canadian Bar Review 496, 496; Baas, above n6, 419.
⁹Manning v Furnasman Heating Limited [1985] 3 WWR 266, 270; Baas, above n6, 419; MacDougall, above n8, 497, Michael E Burke, 'Fixture Financing under the PPSA: The Ongoing Conflict between Realty and Fixture-Secured Interests (1986) 24 Osgoode Hall Law Journal 547.
¹⁰Refer to the author's discussion about the issues with registering a security interest on the land titles registers at item 2.6 below.
¹¹(1991) 77 DLR (4th) 18.
¹²Ronald Cuming, 'The Background to and Overview of The Personal Property Security Act 1993' (Paper presented at Preparing for Changes to the PPSA 1993", University of Saskatchewan, Saskatoon, 28-29 October 1994) 10-11.
¹³Ibid.
¹⁴GMS Securities & Appraisals v Rich-Wood Kitchens Ltd (1991) 77 DLR (4th) 18, 30. This case serves as a useful example of the circulating priority issues that arise under the Canadian Act. However, the reader should be aware that this case has been criticised for its finding that once the fixtures provision was applied as between National Trust and Rich-Wood, its operation was exhausted and it could not be used in relation to the dispute between GMS and Rich-Wood.
¹⁵The rules are provided for in the Land Titles Act, 2000 RS c L-5.1. s27.
¹⁶A similar argument has been proposed in New Zealand: Baas, above n6, 423.
¹⁷As a result of this decision in GMS Securities & Appraisals v Rich-Wood Kitchens Ltd (1991) 77 DLR (4th) 18, 30 the Canadian Act was amended to include a new section 36(18) that provides that priority rights granted under the fixtures priority provisions are not affected by priority rights to the land under The Land Titles Act, 2000 RS c L-5.1. As a result, if this case were to be decided today then it is likely that Rich-Wood would have lost its priority interest in the fixtures because it failed to register its security interest at the land titles registry: MacDougall , above n8, 519.
¹⁸Baas, above n6, 420.
¹⁹David Joseph Somrak, 'The Definition of Fixture in Article 9 of the UCC' (1980-1981) 31 Case Western Reserve Law Review 841, 845.
²⁰Goods attached to the realtywhich can be removed without material injury to the realty: Section 7 of the Conditional Sales Act R.S.S. 1909, c.145.
²¹Report, 'First Report of the Review Committee for Article 9: Preliminary Draft No. 1' (1969) 24 The Business Lawyer 341, 344; Somrak, above n19, 847.
²²Section 1(s) of the Canadian Act defines fixture broadly as "does not include building material". Refer to the discussion of this definition and its application in Bull, above n5. Note that this definition differs from the UCC definition of "Goods are fixtures when they become so related to real estate that an interest in them arises under real estate law: section 9-313(1)(a) of the UCC (1972).
²³Section 128 of the Bond Bill defined fixture as "tangible property that is affixed to land." The policy decision behind that definition was to mirror the common law doctrine of fixtures: Personal Property Securities Bill 2008 (Cth), Attorney-Generals Department, Personal Property Securities Bill 2008: commentary on consultation draft (2008) (the Commentary), 68 [8.14].
²⁴The Bond Bill is a reference to the Personal Property Security Bill (The Bond Bill)' (2002) 14 Bond Law Review 132 (the "Bond Bill").
²⁵This approach is consistent with the Canadian Act which does not define fixture but differs significantly from the Article 9 regime: section 9-313(1)(a) of the UCC.
²⁶Somrak, above n19, 860.
²⁷Leigh v Taylor [1902] AC 157; Elitestone Ltd v Morris [1997] 2 All ER 513; Berkley v Poulett [1977] 1 EGLR 86, Barry Allan, The Personal Property Securities Act 1999 Act & Analysis (Brookers, 2010), 33 [2.3.5]; Vincent M Nathan, 'Priorities in Fixture Collateral in Ohio: A Proposal for Reform (1973) 34 Ohio State Law Journal 719,744.
²⁸Somrak, above n19, 860.
²⁹Ibid.
³⁰This is known as a purchase money security interest (PMSI) in PPSA lexicon. A PMSI is defined broadly in the PPSA to include a security interest granted in exchange for finance or value required to purchase or acquire rights in collateral and includes the interest of a lessor or bailor of a PPS Lease and retention of title suppliers: section 14(1) of the Personal Property Securities Act 2009 (Cth). The definition of PPS Lease is contained in section 13 of the Personal Property Securities Act 2009 (Cth).
³¹The rationale for including this provision in the Canadian Act was that it was included in the Article 9 regime as a concession to Pennsylvanian lawyers because of the peculiarities of their land law: Daniel Fenton Adams, 'Security Interests in Fixtures Under Mississippi's Uniform Commercial Code' (1976) 47 Mississippi Law Journal 831, 866-867 in MacDougall, above n8, 510.
³²MacDougall, above n8, 514.
³³Ibid 515.
³⁴Ibid.
³⁵Ibid 516.
³⁶Sections 79 81 of the NZ Act.
³⁷Sections 87 97 of the Personal Property Securities Act 2009 (Cth).
³⁸Refer to section 36 of the Canadian Act; Duncan Webb, 'Commercial Law' [2002] New Zealand Law Review 199, 207.
³⁹See the New Zealand case of Whenuapai Joinery (1988) Ltd v Trust Bank Central Ltd [1994] 1 NZLR 406 for a more detailed example; see also Webb, above n37, 208.
⁴⁰Mike Gedye, Personal Property Securities: Consolidated Legislation and Analysis, (Thomson: 2001), 18 [4.4].
⁴¹Alphonse M Squillante, ''The Law of Fixtures: Common Law and the Uniform Commercial Code' (Pt 2) (1986-1987) Hofstra Law Review 535, 581.
⁴²The consideration of the national conveyancing program is outside the scope of this paper. However, for information on this initiative see.
⁴³Mike Gedye, 'First to Perfect?' [2011] New Zealand Law Journal 123.
⁴⁴John H Farrar and Mark A O'Regan, 'Reform of Personal Property Security Law' (Preliminary Paper No 6, New Zealand Law Reform Commission, May 1988) 86; 99 - 100.
⁴⁵Ronald C C Cuming and Roderick J Wood A Handbook on the Saskatchewan Personal Property Security Act (Law Reform Commission of Canada, 1987) 209 [3].
⁴⁶This recommendation is to allow the fixture financier sufficient time to enter the land and remove the fixtures before the mortgagee enters into possession of the land and the fixture financier's equitable right is extinguished: Sharon Christensen, 'Reservation of Title in Goods Attached to Personalty or Realty' (1993) 4 Journal of Banking and Finance Law and Practice 264; 276.
⁴⁷at least for so long as the fixture financier's security interest remains in place: Dolan v Bank of Montreal (1984) 37 Sask R 96, 98.
⁴⁸Mike Gedye, 'A Distant Export: The New Zealand Experience with a North American Style Personal Property Security Regime' (2006) 43 Canadian Business Law Journal 208, 214.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.