Leasing goods for a term of more than one year creates a security interest.
This security interest means you have a right to the goods you have leased, even though you may not have physical possession of them. However, this right is not enough on its own.
Let’s say you are in the business of leasing tractors. You lease a tractor to a farmer for a term of two years. A few months later the farmer obtains a mortgage from a creditor and the creditor takes security over all the farmer’s assets. The creditor now has a security interest in the tractor along with your existing security interest.
If the creditor “perfects” the security interest in all of the farmer’s assets by registering the interest on personal property security register, then according to the Personal Property Securities Act 1999 (PPSA), the creditor‘s security interest will take priority over yours. If the farmer defaults on his or her mortgage with the creditor, the creditor can now claim the tractor and sell it to recover what is owing.
Even though the tractor you leased was “yours”, for the purposes of the PPSA it was the creditor with the perfected security, and as such the creditor had the stronger claim to the tractor.
What if you lease the tractor and decide after a few months that you want to register (perfect) your security interest? This would be too late under the PPSA as the security interest needs to be registered within 10 working days of the farmer taking possession of the tractor.
One last point, the above will not apply where the party leasing the goods is not regularly engaged in the business of leasing the particular goods. If you only have one tractor which you lease to your neighbour who you’ve known for years then a creditor’s claim is unlikely to defeat your interest.
If you are unsure about the law under the PPSA, get in touch with our business law team and we can ensure that your goods are protected from third party claims.