Australia: Fixtures and the PPSA 2009: fuzzy logic?

Introduction

This article is the second in a three part series discussing whether the exclusion of fixtures from the scope of the PPSA is appropriate.

• The first article "Fixtures and Personal Property Securities Act: maintaining the status quo" published in October in (2011) 27(4) BLB, discussed the common law rules relating to fixtures and the Canadian mechanism for overcoming the issues associated with those common law rules.
• This article examines the logic behind this omission by analysing why both the New Zealand and Australian drafters elected to exclude fixtures from their respective personal property securities legislation.
• The third article will suggest possible amendments to the PPSA and consider how secured parties can protect their interest in fixtures after the implementation of the PPSA.

The Personal Property Securities Act 2009 (Cth) (PPSA) is currently clue to commence in early 2012. One of the primary aims of the PPSA is to provide transparency by implementing a single national law and register that will apply to all personal property security interests in Australia. However, there are a number of important exclusions from the scope of the PPSA including land, certain rights declared not to be personal property for the purposes of the PPSA¹ and fixtures.

Although the PPSA was originally drafted to reverse the common law position in relation to fixtures,² the Australian drafters, in a marked departure from their Canadian counterparts (Canadian PPSA of 1993),elected to follow the New Zealand PPSA of 1999 [NZ Act) 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.

Canadian position

To properly understand why Australian and New Zealand drafters elected to exclude fixtures from the scope of the PPSA, it is first necessary to consider the Canadian solution to protecting security interests over fixtures.³

Section 36 of the Canadian Act sets out specific priority rules that govern security interests in fixtures and competing security interests in land (fixture provisions).

The fixture provisions provide a practical mechanism for determining priority disputes between fixture financiers and mortgagees by requiring a fixture financier to, among other things, register a notice on the relevant land titles register to obtain priority over a subsequent purchaser or mortgagee.

This means that a subsequent purchaser of mortgagee can rely on the integrity of the land titles system before purchasing land or advancing funds for which the land is given as security.

The Canadian Act codifies the priority rules for fixtures in a clear and accessible manner gives effect 10 the parties' likely commercial expectations. This article will now consider why the New Zealand and Australian drafters elected to exclude fixtures from the scope of their respective personal property securities legislation.

New Zealand position

The NZ Act is silent in relation to fixtures. It is not entirely clear why the New Zealand drafters elected to exclude such an important provision. What is clear is that the New Zealand drafters do not appear to have undertaken a detailed consideration of the issue before electing to exclude fixtures from the scope of the NZ Act.

The New Zealand drafters originally proposed to include a provision, not dissimilar to the pre-PPSA provisions contained in live Chattels Transfer Act 1924 (NZ) that were designed to work around a list of chattels that would be included in a schedule to the NZ Act, and, notwithstanding any affixation to land, remain personal property for the purposes of the NZ Act⁴ However, in the end, and with little justification for doing so, the New Zealand drafters elected to simply ignore fixtures altogether.

Two main arguments were raised in New Zealand supporting a divergence from the Canadian fixture provisions:

Different law and circumstances

The first of those arguments was that the pre-PPSA law and circumstances in New Zealand were different to those that applied in Canada. The drafters considered that construction financing differed so significantly in Canada that NZ fixture financiers did not require the protection afforded by the fixture provisions.

The drafters were also concerned that the provisions would be more of a "shock" to New Zealand than they had been in Canada, because the Canadians had recognised the priority of fixtures in their pre-PPSA legislation.

However, this argument ignores the fact that the protection of security interests in fixtures is not foreign to New Zealand. In fact, the now repealed Chattel Transfer Act had allowed for the possibility of a chattel security in some items of farming and manufacturing plant, despite their being affixed to the land.

This argument also fails to recognise the substantial similarities between the common law of Canada and that of New Zealand, as well as the use of the Titling System of land title in both countries.

There is no rationale for this argument. The New Zealand Torrens system is more centralised than the Canadian provincial registers and the omission of the fixture provisions from the NZ Act effectively removes any protection a fixture financier in New Zealand would have had under the Chattel Transfer Act.

Canadian problems

The second argument tor omitting fixtures from the NZ Act focused on apparent issues the Canadians were experiencing with the fixture provisions in the Canadian Act.

Unfortunately, the New Zealand reformers did not elaborate on these issues except to state that the Canadian rules were "less than satisfactory in practice and had. more than any other feature of the Canadian Act, been subject to a number of amendments."⁵

What the New Zealand drafters overlooked was that the fixture provisions had been the subject of amendment not because the priority mechanism did not work, but rather because the Canadian drafters (and their US counterparts) could not agree on a definition of "fixture" to be included in the legislation. Also, the Canadian case law dealing with the fixture provisions did not focus on the fundamental fixture priority rules.

The NZ Act's failure to deal with fixtures means New Zealand's fixture financiers must rely on the unsatisfactory common law rules to determine whether the chattels which they supplied or lent money to purchase are fixtures. As a result, they bear an enormous risk if they take a security interest in chattels that become fixtures as they will lose their security interest in those items upon affixation and any mortgagees and purchasers of the land will consequently gain an unintended windfall.

Many of the justifications for rejecting a fixtures provision were not substantiated in New Zealand. For example, no justification was provided as to how the New Zealand construction funding differed from Canadian construction funding and the drafters, although noting that the land titling systems in the United States and New Zealand were substantially different, failed to recognise that the Canadian system was also based on the Torrens system of land titling.⁶

A number of commentators have indicated that the omission is puzzling⁷ and should be remedied. The writer agrees and submits the issues raised by the New Zealand reformers should not have resulted in the exclusion of fixtures from the NZ Act Instead, the drafters should have taken the aspects of the Canadian Act that appealed to them and amended them to overcome the areas of concern. For example, the NZ drafters could have looked behind the Canadian Act to the Uniform Commercial Code (UCCI and adopted some of the initiatives adopted in that jurisdiction.⁸

Regardless of whether the exclusion of fixtures from the NZ Act was a sensible idea, the Australian drafters appear to have given some weight to that decision when drafting the PPSA.

Australian position

The PPSA, in a marked departure from the Canadian Act, but in line with the NZ Act, does not include a provision dealing with priority disputes relating to fixtures.

As was the case in New Zealand, the reasons for excluding fixtures from the scope of the PPSA are not entirely clear. However, it was evident there would be a divergence of views in this area from the very begin ning.

In 1992, the proposals for reform set out in the Queensland and Victorian paper⁹ recommended Australia adopt a system similar to the Article 9 regime.¹⁰ On the other hand, the joint Commonwealth and New South Wales reform paper¹¹ proposed the PPSA not apply to fixtures. Notwithstanding those differences of opinion it was agreed that reform in this area of law was required, even if there was disagreement about whether the PPSA was the correct place to attempt it.

In July 2006, the reform agenda regained momentum resulting in the Personal Property Security Bill (Bond Bill)¹² which contained a fixtures provision that was almost identical to that contained in the Canadian Act.

By the time the bill reached the Senate, the view was that the inclusion of a fixture provision in the PPSA would be necessary to balance the interests of fixture financiers with those of mortgagees.¹³ The proposed provisions subordinated any interest in land to the interest of a fixture financier. That proposal gained momentum and a variation of s 36 was included in both the initial draft of the Bond Bill and the consultation draft of the PPSA Rill 2008.¹⁴ That proposed section, although worded quite differently to the equivalent Canadian provision, largely mirrored the intention behind s 37 of the Canadian Act and, with a few exceptions, gave priority to the fixture financier provided the fixture security interest was disclosed on the relevant State or Territory land titles register.¹⁵

Although there was some concern about the drafting style adopted in the Australian fixture provisions, there was an overwhelming support ihat the fixture provisions remain in the PPSA.

However, by the time the amended Bill reached the Senate in March 2009, the fixture provisions had been removed. The policy reasons for excluding fixtures from the PPSA appear to be as follows:

Maintain the status quo

Although the passage of the PPS Bill through parliament indicates a general acceptance of the fixture provisions, the states and territories expressed an underlying reluctance to overhaul the doctrine of fixtures. Rather than include fixture provisions in the PPSA, the Standing Committee of Attorneys-General proposed a detailed review of the laws on fixtures before determining whether the fixture provisions should be included in any future amendment to the PPSA.

However, notwithstanding the proposed reform, the writer considers there was likely to have been a political agenda in the decision to exclude fixtures from the PPSA - first, to ensure harmonisation of laws between New Zealand and Australia, and second to allow the states and territories to maintain control of their relevant land titles registers.

Difficulties with state-based registers

The fixture provisions in the Canadian Act require a fixture financier to register its security interest not only on the Personal Property Register (PPR) but also on the relevant land titles register. The fixture provisions in the Bond Bill mirrored the Canadian Act.

It was acknowledged that if Australia were to adopt a fixture provision that would necessarily involve some interaction between the PPR and the relevant land titles registers. It was that interrelationship of registers that resulted in the states and territories voicing their concerns about the impact such a relationship would have on their respective land laws.

Notwithstanding the reason given in the agreement, the writer considers the major driver for excluding fixtures from the scope of the PPSA is likely to have been a means by which the states and territories could retain control of their state-controlled land titles registers, without having to also cede control of those registers to the Commonwealth.

Whatever the reason, the result is that priority disputes between fixture financiers and mortgagees must continue to be determined in accordance with the common law tests. As in New Zealand, if the degree and purpose of annexation are such that the collateral is considered to be a fixture, then the fixture financier loses its security interest and priority in the chattels.

It is unfortunate that the Australian legislature did not follow the Canadian Act in this respect, as the common law rules relating to fixtures are complex and uncertain and often difficult to apply. The Canadian Act clearly results in a more equitable outcome and the writer considers the PPSA. together with the relevant land titles legislation, should be amended to adopt the Canadian approach.

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.

In order to prevent a windfall to a mortgagee or a subsequent purchaser of the land, the PPSA must be amended to better balance the competing interests of mortgagees and those of fixture financiers. A failure to promptly deal with this issue will undermine the purpose of the PPSA and as a result of the inconsistencies in the application of tlie common law principles leave the barriers to fixture financing in place.

Footnotes

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.