By Bruce Bulford (22 July 2013) - Author of "Liquor Licensing Law & Practice NSW".

Introduction

On 30 January 2012, the transition from the old system of company charges under the Corporations Act 2001 (Cth) and bills of sale under the multiple State-based Bills of Sale Acts, to the new Personal Property Security regime under the Personal Property Securities Act 2009 (Cth) (PPSA) took place. I must confess I only took a passing interest in the PPSA and the new regime which it created.

This state of indifference was brought to an end by the decision of Brereton J in Re Maiden Civil (P&E) Pty Ltd [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 Ltd) (QES) leased three items of earthmoving equipment to Maiden Civil (P&E) Pty Ltd (Maiden Civil). 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.

QES had a “security interest”, within the meaning of the PPSA, in the earthmoving equipment. The point of failure for QES 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 Ltd [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 on a rejection of derivative title theory in favour of registration as the principal mechanism for ranking priority both among 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 confirmed in the PPSA jurisprudence and expressly stated in some of the more recent PPSAs. 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.”

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.

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 Wonall Pty Ltd v Clarence Property Corporation Ltd [2003] NSWSC 497 and Jabetin Pty Ltd v Liquor Administration Board (2005) 63 NSWLR 602; [2005] NSWCA 92 (Jabetin’s Case).

The hard lesson now learned from the Maiden Civil Case is that despite all 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.

The PPS regime is about registering interests over “personal property”, as defined by the PPSA. Section 10 of the PPSA 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 (NSW) or the Gaming Machines Act 2001 (NSW) have made such a declaration. In the ACT, Northern Territory, Queensland and Western Australia, those transferrable liquor licences under these State regimes have been declared not to be “personal property” for the purposes of the PPSA. Therefore in New South Wales (for the time being) hotel licences, PMEs and PMPs are all “personal property” for the purposes of the PPSA. The same applies to South Australia, Tasmania and Victoria.

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.

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 security interests, capable of registration by the landlord over the lessee and (potentially) the licensee. However, as a matter of practicalities, 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.

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.

A hotel lease cannot establish a registrable security interest under the PPSA. Also, 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. The next release of "Liquor Licensing Law & Practice NSW" will include an updated precedent Licensee Deed and further commentary.

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?

These landlords simply cannot sit by and 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.

In preparing the Bulletin I wish to acknowledge the valuable assistance of Doctor James O’Donovan, Professor of Law, University of Western Australia and author of the Thomson Reuters publication, “Personal Property Securities Law in Australia”.

The full Bulletin can be viewed in Liquor Licensing Law & Practice NSW online - visit the Thomson Reuters estore at http://www.thomsonreuters.com.au for details.