Case Study – Facts
The landlord owns a number of dwellings, which it rents out to residential tenants. The dwellings are let with washing machines, refrigerators, pool equipment (where required), stoves, air-conditioners and other household items.
Prior to the commencement of the Personal Property Securities Act 2009 (Cth) (“PPSA”) The Bank had a fixed and floating charge over all assets and undertakings of the Landlord.
The landlord has contracted to sell a dwelling with a number of “included chattels” to the purchaser (who intends to use the property as a residence). The parties used the REIQ Contract.
The charge is registered as a security interest under the PPSA in favour of the bank. The bank also holds a registered mortgage over the land.
Section 275 of the PPSA requires the bank as the secured party to provide certain information relating to the subject security interest to the landlord as the grantor.
Information Regarding The Property
The solicitor for the purchaser wrote to the landlord’s solicitor in accordance with clause 8.4(3) of the REIQ Contract, requesting to be provided with the following:
(a) copies of all security interests of the vendor landlord, and
[Where the vendor is an individual:
(b) the birth date of the vendor landlord so the purchaser’s solicitor could undertake a Personal Property Securities Register(PPSR) search in respect of the vendor landlord.]
[Upon the date of birth of the vendor landlord being provided to the purchaser, relevant PPSR searches were undertaken.]
The information from the landlord confirmed for the purchaser that all chattels being sold under the contract were subject to the security interest in favour of the bank.
Pre-settlement correspondence from the vendor landlord proposed that at settlement the purchaser would be given a release of mortgage over the freehold. The purchaser was told “that should cover it”.
The purchaser is concerned that the release of the mortgage would not release the chattels included in the sale from the security interest in favour of the bank.
Issue 1: Under the contract, can the purchaser require a release of the security interest in relation to the chattels sold?
The following clauses of the REIQ Contract are relevant here:
“5.3(1) In exchange for payment of the Balance Purchase Price, the Seller must deliver to the Buyer at settlement: …
(c) any instrument necessary to release any Encumbrance over the Property in compliance with the Seller’s obligation in clause 7.2
7.2 The Property is sold free of all Encumbrances other than the Title Encumbrances and Tenancies
5.5 On the Settlement Date, in exchange for the Balance Purchase Price, the Seller must give the Buyer vacant possession of the Land and the Improvements except for the Tenancies. Title to the Included Chattels passes at settlement.
9.1(1) … if the Seller or Buyer, as the case may be, fails to comply with an Essential Term … the Seller (in the case of the Buyer’s default) or the Buyer (in the case of the Seller’s default) may affirm or terminate this contract.”
Clause 1.1(2)(k) of the REIQ Contract defines “Essential Term”, in the case of breach by the Seller, as including 5.3(1)(a)-(d) and therefore 5.3(1)(c).
Clause 9.3 provides that if the Buyer affirms the contract, it may sue the Seller for damages
and/or specific performance.
Decision For The Purchaser
You cannot dispose of an interest greater than the interest you possess (see s 133 of the PPSA), so unless the security interest is removed from the included chattels prior to settlement, the purchaser would take the included chattels subject to the security interest of the secured party bank.
The purchaser is entitled to write to the vendor requesting the security interest be removed from the included chattels in order to give clear title to the included chattels to the purchaser at settlement. If this does not occur, the purchaser will be entitled to terminate or affirm the contract as per clause 9.1.
This would seem to require some refinancing of the security interest goods by the vendor landlord with the bank before settlement could proceed.
Issue 2: Should the release be registered?
The bank has a registered security interest over the included chattels. It is enforceable and grants priority to the bank over others claiming an interest. That security interest directly affects the vendor. For its own purposes the vendor wants to rely upon the release of the security interest over the included chattels the bank granted. The vendor would be motivated to register a financing change statement on the PPSR based on the release of the security interest provided by the bank.
The vendor is then in a better position to provide clear title to the included chattels to the purchaser.
Issue 3: What if the purchaser was unaware of the security interest at the time of the sale, because it was not on the register?
The purchaser had given value to the landlord by giving the purchase price for the property )s 10 of the PPSA(. Section 43 of the PPSA enables the purchaser for value to take the included chattels free of any unperfected security interest the bank might seek to claim.
A bona fide purchaser of goods takes them free of any security interest, if the personal property was sold in the ordinary course of the business of the seller, which was selling personal property of that kind (s 46 of the PPSA).
These facts suggest that the bank has not given the landlord notice of any security interest it holds over the property as s 157(1) of the PPSA requires. There is also no evidence to suggest that the bank has given the purchaser notice of any security interest it may claim to hold over the property. Nor is there any evidence to suggest that the landlord has given the purchaser any notice of any security interest the bank may claim to hold over the property. Constructive knowledge is defined in s 297 of the PPSA. Registration of data does not constitute constructive notice of the existence of the subject security interest (see s 300). On these facts, there appears to be no reason to impose constructive knowledge of the security interest upon the purchaser. Further, even if an obligation to search the register can be imposed on the purchaser, that search will reveal no security interest on the modified facts posed in Issue 3.
If the purchaser of the real property and included chattels could be said to be a bona fide purchaser of the goods, and the landlord was selling the included chattels in its ordinary course of business )of selling its real estate(, the purchaser would take them free of any security interest.
Where the bank has not registered the relevant security interest on the PPSR it suffers the relevant diminution in the priority of the interest it seeks to claim. The purchaser has no need or entitlement to register anything on the PPSR as it enjoys no registrable interest.
The Bank and The Vendor
As for the bank and the vendor, the bank will still have a contractual remedy against the vendor, however the failure on the part of the bank to register the security interest means that the bank will not have priority as a secured creditor under the PPSA. The bank then becomes an unsecured creditor in relation to the vendor.
Ross Bowler LLB